Study On Deflationary Effect Of Economic Globalization

Taking the ongoing global deflationary trend as study object, this paper analyzes the deflationary effect of economic globalization, and in particularly explores the transmission mechanism from international trading and foreign financing channels, convergency of macro-economic policy targets, and synchronization of world economic cycles. This paper draws some indicative conclusions as following:1. Foreign trade would affect domestic price and aggregate supply & demand through export & import prices as well as their quantities. This would lead the prices in different countries to be converged, and make it possible for deflationary pressure to be spread from one area to the others.2. In case of open economy, the debt-deflation effect would appear as an"over-borrowing and credit crunch cycle"in international capital markets. As capital mobility increasing, the international financial markets are becoming more likely co-movement. The asset prices in different markets show similar boom-bust cycle, and the currency crises appear to be contagious. The risk of deflation is hiking, as the markets would take very long time to restore their equilibrium after the bust of asset bubbles.3. Macro-economic policy goals are converged across different countries as economic integration deepening. According to game theory, the authorities in different countries would prefer to apply tightening economic policies under non-cooperative condition, which exert downward pressure on global price movements. Sticking to good fiscal discipline would facilitate the improvement of budget balance, which would support the obtaining of low interest rate and low inflation. However, when the economy experiences cyclical adjustment, liquidity trap and deflation trap are more likely occurring. The monetary policy effectiveness is asymmetric. Once the economy slips into liquidity trap, monetary policy is hardly becoming effective. Furthermore, monetary policy could do little to prevent or cure asset bubbles. The financial markets show"boom-bust cycles". After the burst of bubbles, the threat of credit crunch and deflation would increase.4. Different from the BOP adjustment mechanism under Golden Standard, nowadays, the massive accumulations of foreign reserves in some countries are not a sum-zero game. Actually, it is formulating an interdependent international economic relationship as"you buy my goods, I buy your bonds". To some extent, it is a mean of reflation rather than a source of global deflation.5. Exchange rate defines relative price between two different currencies. It is an important bridge linking two different price systems together. Through trade, financial and confidence channels, various fixed exchange rate arrangements under Golden Standard and Fiat Money Standard do play a role in spreading deflation or deflationary expectation from one country to the others. With the existence of appreciation syndrome and exchange rate passing through effect, the flexible exchange rate regimes could not be immune from contagion effect of deflation either.6. Global deflationary trend is a cyclical economic phenomena. As the global economic integration strengthening, the boom-bust cycles in world economic and financial fields are becoming more and more synchronic. Under the low interest rate and low inflation environment, deflationary threat would rise when the global economy and international financial markets encounter cyclical bust.7. With trade, financial and macro-economic policy factors taken into account, China is a victim of global deflationary trend instead of being asserted as an exporter of deflation to the rest of world.