Petrodollars, Globalization and U.S Inflation

This paper evaluates the theoretical and empirical evidence bearing on the question of whether globalization and petrodollars recycling contributed to significant changes in inflation performance in U.S. We are assuming that the impact of globalization can be direct and indirect. Direct impact is through the cheaper imported goods to the U.S as a component of Consumer Price Index. Indirect impacts are through the effects on wage, cost of capital, inflow of funds including the petrodollars and the impacts of price of competing goods. Data for analysis is complied from the Department of Commerce and IMF for period of 1990-2005. Our findings suggest that, under current circumstances, the globalization could have only a modest disinflationary effect on U.S inflation. But if some fundamental factors changes such as appreciation of these country's exchange rates, increase in demand, wage increase then these will reduce the degree of downward pressure on U.S inflation.