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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.

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Bibliographic Info

Article provided by International Journal of Central Banking in its journal International Journal of Central Banking.

Volume (Year): 8 (2012)
Issue (Month): 1 (March)
Pages: 227-266

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Handle: RePEc:ijc:ijcjou:y:2012:q:1:a:11

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  1. Luca Guerrieri & Christopher Erceg & Martin Bodenstein, 2008. "Oil Shocks and External Adjustment," 2008 Meeting Papers 945, Society for Economic Dynamics.
  2. Argia M. Sbordone, 2007. "Globalization and Inflation Dynamics: The Impact of Increased Competition," NBER Chapters, in: International Dimensions of Monetary Policy, pages 547-579 National Bureau of Economic Research, Inc.
  3. Deren Unalmis & Ibrahim Unalmis & Derya Filiz Unsal, 2008. "Oil Price Shocks, Macroeconomic Stability and Welfare in a Small Open Economy," Working Papers 0802, Research and Monetary Policy Department, Central Bank of the Republic of Turkey.
  4. Kilian, Lutz, 2006. "Not All Oil Price Shocks Are Alike: Disentangling Demand and Supply Shocks in the Crude Oil Market," CEPR Discussion Papers 5994, C.E.P.R. Discussion Papers.
  5. Gianluca Benigno & Pierpaolo Benigno, 2003. "Price Stability in Open Economies," Review of Economic Studies, Wiley Blackwell, vol. 70(4), pages 743-764, October.
  6. Pierpaolo Benigno, 2009. "Price Stability with Imperfect Financial Integration," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 41(s1), pages 121-149, 02.
  7. Benigno, Gianluca & Benigno, Pierpaolo & Ghironi, Fabio, 2007. "Interest rate rules for fixed exchange rate regimes," Journal of Economic Dynamics and Control, Elsevier, vol. 31(7), pages 2196-2211, July.
  8. Jonathan E. Hughes & Christopher R. Knittel & Daniel Sperling, 2006. "Evidence of a Shift in the Short-Run Price Elasticity of Gasoline Demand," NBER Working Papers 12530, National Bureau of Economic Research, Inc.
  9. Alessia Campolmi, 2009. "Oil price shocks: Demand vs Supply in a two-country," 2009 Meeting Papers 877, Society for Economic Dynamics.
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Cited by:
  1. Holz , Carsten A. & Mehrotra, Aaron, 2014. "Wage and price dynamics in a large emerging economy: The case of China," BOFIT Discussion Papers 3/2014, Bank of Finland, Institute for Economies in Transition.
  2. Auer, Raphael & Mehrotra, Aaron, 2014. "Trade linkages and the globalisation of inflation in Asia and the Pacific," CEPR Discussion Papers 9949, C.E.P.R. Discussion Papers.
  3. Thomas Mayer & Holger Schmieding & Manfred Jäger-Ambrozewicz & Michael Lamla & Jan-Egbert Sturm & Ulrich Kater & Leon Leschus & Wolfgang Brachinger, 2011. "Zinserhöhung der EZB: Wie groß ist die Inflationsgefahr?," Ifo Schnelldienst, Ifo Institute for Economic Research at the University of Munich, vol. 64(14), pages 03-26, 07.
  4. 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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