New research from the IMF examines the extent to which digitalization—measured by a new national IP proxy—has influenced inflation dynamics in a sample of 36 advanced and emerging economies over 2000-2017. "The digitalization process has been transforming the global economy over the past 25 years. Information and communication exchanges have exploded, triggering a major transformation of production and distribution processes and financial and payments systems, among many other activities," Balazs Csonto, author of the report, states. Phillips curve estimates show that digitalization has a statistically significant negative effect on inflation in the short run. Its economic impact is not large but has increased since 2012 and mainly operates through a cost/competition channel. Principal components and cointegration analysis further suggest digitalization is a key driver of lower trend inflation. Digitalization appears to be a relevant force explaining the persistently low inflation observed across the world over the past two decades. The difficulties in rationalizing these trends calls for considering factors beyond the traditional drivers of inflation. Much of the macroeconomic
literature has focused on the role of global factors however, no study has conducted a systematic cross-country level analysis of the impact of digitalization on inflation at the aggregate level. " Our results show that digitalization is a key determinant of the global trend or structural component of inflation. Also, digitalization has contributed to reducing short-term inflation, particularly since 2012. We also show that digitalization
mainly affects inflation through a direct cost/mark-up channel—associated with the impact that digitalization has on costs through improved productivity or through increased competition— and to a lesser extent an indirect cost channel," Csontos concludes.
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