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Tailwinds and Headwinds: How Does Growth in the BRICs Affect Inflation in the G-7?

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  • Anna Lipínska

    (Federal Reserve Board)

  • Stephen Millard

    (Bank of England and Durham Business School)

Abstract

In 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.

Suggested Citation

  • Anna Lipínska & Stephen Millard, 2012. "Tailwinds and Headwinds: How Does Growth in the BRICs Affect Inflation in the G-7?," International Journal of Central Banking, International Journal of Central Banking, vol. 8(1), pages 227-266, March.
    • Handle: RePEc:ijc:ijcjou:y:2012:q:1:a:11
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    Cited by:

    1. Christian Dreger & Malte Rieth & David Pothier, 2015. "Is Globalization Reducing the Ability of Central Banks to Control Inflation? In-Depth Analysis," DIW Berlin: Politikberatung kompakt, DIW Berlin, German Institute for Economic Research, volume 106, number pbk106, Enero-Abr.
    2. Auer, Raphael A. & Mehrotra, Aaron, 2014. "Trade linkages and the globalisation of inflation in Asia and the Pacific," Journal of International Money and Finance, Elsevier, vol. 49(PA), pages 129-151.
    3. Riggi, Marianna & Venditti, Fabrizio, 2015. "The time varying effect of oil price shocks on euro-area exports," Journal of Economic Dynamics and Control, Elsevier, vol. 59(C), pages 75-94.
    4. John Lewis & Jumana Saleheen, 2018. "Tailwinds from the East: how has the rising share of imports from emerging markets affected import prices?," Cambridge Journal of Economics, Oxford University Press, vol. 42(5), pages 1343-1365.
    5. Carsten A Holz & Aaron Mehrotra, 2013. "Wage and price dynamics in a large emerging economy: The case of China," BIS Working Papers 409, Bank for International Settlements.
    6. Raphael Auer & Aaron Mehrotra, 2014. "Real globalisation and price spillovers in Asia and the Pacific," BIS Papers chapters, in: Bank for International Settlements (ed.), Globalisation, inflation and monetary policy in Asia and the Pacific, volume 77, pages 81-89, Bank for International Settlements.
    7. Carsten A. Holz & Aaron Mehrotra, 2016. "Wage and Price Dynamics in China," The World Economy, Wiley Blackwell, vol. 39(8), pages 1109-1127, August.
    8. Thomas Mayer & Holger Schmieding & Manfred Jäger-Ambrozewicz & Michael Lamla & Jan-Egbert Sturm & Ulrich Kater & Leon Leschus & Wolfgang Brachinger, 2011. "ECB rate hike: How large is the risk of inflation?," ifo Schnelldienst, ifo Institute - Leibniz Institute for Economic Research at the University of Munich, vol. 64(14), pages 03-26, July.
    9. Carsten A Holz & Aaron Mehrotra, 2013. "Wage and price dynamics in a large emerging economy: The case of China," BIS Working Papers 409, Bank for International Settlements.
    10. Ma, Yong & Lv, Lin, 2022. "Money, debt, and the effects of fiscal stimulus," Economic Analysis and Policy, Elsevier, vol. 73(C), pages 152-178.
    11. repec:zbw:bofitp:2014_003 is not listed on IDEAS
    12. Stracca, Livio, 2013. "The rise of China and India: blessing or curse for the advanced countries?," Working Paper Series 1620, European Central Bank.

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    More about this item

    JEL classification:

    • E12 - Macroeconomics and Monetary Economics - - General Aggregative Models - - - Keynes; Keynesian; Post-Keynesian; Modern Monetary Theory
    • 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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