ABSTRACT
This chapter observes the relationship between globalization and domestic inflation in 17 OECD countries from 1985 to 2005 based on the traditional Phillips Curve model. It is found that the weighted average foreign output gap has a significant positive impact on domestic inflation and shows an upward trend. The chapter introduces the factors of globalization into the pricing mechanism of micro firms based strictly on the micro theoretical foundation, and then constructs the inflation dynamic mechanism model with factors of globalization based on the microfoundation instead of subjectively adding the factors of globalization directly to the macro-inflation model, which is essentially different from the existing studies. For the selection of instrumental variables, we should not only consider the economic relationship between instrumental variables and their respective variables in the model, but also consider the rationality of the number of instrumental variables relative to the sample size, and ensure that the instrumental variables are independent of the disturbance term.
