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Global Relative Price Shocks: The Role of Macroeconomic Policies

In: Inflation in an Era of Relative Price Shocks

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Author Info

  • Adam Cagliarini

    (Reserve Bank of Australia)

  • Warwick McKibbin

    (Centre for Applied Macroeconomic Analysis, The Australian National University)

Abstract

We use the multi-sector and multi-country G-Cubed model to explore the potential role of three major shocks – to productivity, risk premia and US monetary policy – to explain the large movements in relative prices between 2002 and 2008. We find that productivity shocks were major drivers of relative price movements, while shocks to risk premia and US monetary policy contributed temporarily to some of the relative price dispersions we observe in the data. The effect of US monetary policy shocks on relative prices was most pronounced in countries that fix their currency to the US dollar. Those countries that float were largely shielded from these effects. We conclude that the shocks we consider cannot fully capture the magnitude of the relative price movements over this period, suggesting that other driving forces could also be responsible, including those outside of the model.

(This abstract was borrowed from another version of this item.)

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Bibliographic Info

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This chapter was published in: Renée Fry & Callum Jones & Christopher Kent (ed.) Inflation in an Era of Relative Price Shocks, Reserve Bank of Australia, pages , 2010.

This item is provided by Reserve Bank of Australia in its series RBA Annual Conference Volume with number acv2009-18.

Handle: RePEc:rba:rbaacv:acv2009-18

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Related research

Keywords: relative price shocks; productivity; risk premia; monetary policy; developing economies; G-Cubed; DSGE models;

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  1. John B. Taylor, 2009. "The Financial Crisis and the Policy Responses: An Empirical Analysis of What Went Wrong," NBER Working Papers 14631, National Bureau of Economic Research, Inc.
  2. Matthew B. Canzoneri & Dale W. Henderson, 1991. "Monetary Policy in Interdependent Economies: A Game-Theoretic Approach," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262031787, January.
  3. McKibbin, Warwick J & Vines, David, 2000. "Modelling Reality: The Need for Both Inter-temporal Optimization and Stickiness in Models for Policy-Making," Oxford Review of Economic Policy, Oxford University Press, vol. 16(4), pages 106-37, Winter.
  4. McKibbin, W.J. & Wilcoxen, P.J., 1995. "The Theoretical and Empirical Structure of the G-Cubed Model," Papers 118, Brookings Institution - Working Papers.
  5. Benigno, Pierpaolo, 2002. "A simple approach to international monetary policy coordination," Journal of International Economics, Elsevier, vol. 57(1), pages 177-196, June.
  6. Aoki, Kosuke, 2001. "Optimal monetary policy responses to relative-price changes," Journal of Monetary Economics, Elsevier, vol. 48(1), pages 55-80, August.
  7. Taylor, John B., 1993. "Discretion versus policy rules in practice," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 39(1), pages 195-214, December.
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