Tailwinds and Headwinds: How Does Growth in the BRICs Affect Inflation in the G-7?
AbstractIn this paper, we analyze the impact of a persistent productivity increase in a set of countries—which we think of as the economies of Brazil, Russia, India, and China (BRIC)—on inflation in their trading partners, the Group of Seven (G-7). In particular, we want to understand the conditions under which this shock can lead to tailwinds or headwinds in the economies of trading partners. We build a three-country dynamic stochastic general equilibrium (DSGE) model in which there are two oil-importing countries (home and foreign) and one oilexporting country. In our benchmark calibration, we find that the tailwind effect, lowering inflation in the home economy, dominates the headwind effect. However, if the oil demand elasticity is low (equal to the empirical short-run estimate) or the labor market is flexible, inflation at home rises in the subsequent periods as a result of the foreign productivity shock.
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Bibliographic InfoArticle provided by International Journal of Central Banking in its journal International Journal of Central Banking.
Volume (Year): 8 (2012)
Issue (Month): 1 (March)
Other versions of this item:
- Lipinska, Anna & Millard, Stephen, 2011. "Tailwinds and headwinds: how does growth in the BRICs affect inflation in the G7?," Bank of England working papers 420, Bank of England.
- E12 - Macroeconomics and Monetary Economics - - General Aggregative Models - - - Keynes; Keynesian; Post-Keynesian
- F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics
- E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
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