Vertically Globalized Production Structure in New Keynesian Phillips Curve

This paper revisits the hypothesis that globalization may weaken central bank’s monetary control by shedding light on the role of vertically globalized production structure that increasingly permeates the international production process in the transmission of foreign disturbances into domestic macroeconomic dynamics given a standard monetary policy rule. We do so through the lens of new Keynesian model with Calvo-type staggered price setting and production function that uses foreign intermediate inputs. We find that central bank guided by typical Taylor’s rule has to confront a policy tradeoff between stabilizing inflation and output gap as real exchange rates have transformed foreign disturbances into domestic supply shocks channeled through real marginal cost