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Globalization and Inflation: The Role of China

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  • Denise Côté
  • Carlos de Resende

Abstract

In this paper, we develop a theoretical model which identifies four channels-import prices, competition with domestic suppliers and workers, and commodity prices-through which priceand wage-setting conditions in country j may affect inflation in country i. We estimate a dynamic inflation equation derived from the theoretical model using a quarterly dataset of eighteen OECD countries over the 1984-2006 period. Although our methodology can be applied to any pair of countries, we focus on the effect of China on the inflation rate of other countries. Our results suggest that while China's negative effect on global inflation has been quantitatively modest, it has increased in absolute terms since the early 2000s. We also find evidence that, for most countries examined, competition with domestic suppliers has been the most important channel.

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Bibliographic Info

Paper provided by Bank of Canada in its series Working Papers with number 08-35.

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Length: 37 pages
Date of creation: 2008
Date of revision:
Handle: RePEc:bca:bocawp:08-35

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Keywords: International topics;

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References

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  1. Graydon Paulin, 2006. "Credibility with Flexibility: The Evolution of Inflation-Targeting Regimes, 1990–2006," Bank of Canada Review, Bank of Canada, vol. 2006(Summer), pages 5-18.
  2. Charles T Carlstrom & Timothy S Fuerst, 2009. "Central Bank Independence And Inflation: A Note," Economic Inquiry, Western Economic Association International, vol. 47(1), pages 182-186, 01.
  3. Antulio N. Bomfim & Glenn D. Rudebusch, 1998. "Opportunistic and deliberate disinflation under imperfect credibility," Finance and Economics Discussion Series 1998-01, Board of Governors of the Federal Reserve System (U.S.).
  4. Athanasios Orphanides & David W. Wilcox, 1996. "The opportunistic approach to disinflation," Finance and Economics Discussion Series 96-24, Board of Governors of the Federal Reserve System (U.S.).
  5. Luke Willard & Tarhan Feyzioglu, 2006. "Does Inflation in China Affect the United States and Japan?," IMF Working Papers 06/36, International Monetary Fund.
  6. Carlos de Resende, 2007. "Cross-Country Estimates of the Degree of Fiscal Dominance and Central Bank Independence," Working Papers 07-36, Bank of Canada.
  7. Jane Ihrig & Steven B. Kamin & Deborah Lindner & Jaime Marquez, 2007. "Some simple tests of the globalization and inflation hypothesis," International Finance Discussion Papers 891, Board of Governors of the Federal Reserve System (U.S.).
  8. Newey, Whitney K & West, Kenneth D, 1987. "Hypothesis Testing with Efficient Method of Moments Estimation," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 28(3), pages 777-87, October.
  9. Louis Morel, 2007. "The Direct Effect of China on Canadian Consumer Prices: An Empirical Assessment," Discussion Papers 07-10, Bank of Canada.
  10. George T. McCandless, Jr. & Warren E. Weber, 1995. "Some monetary facts," Quarterly Review, Federal Reserve Bank of Minneapolis, issue Sum, pages 2-11.
  11. Laurence M. Ball, 2006. "Has Globalization Changed Inflation?," NBER Working Papers 12687, National Bureau of Economic Research, Inc.
  12. Claudio E. V. Borio & Andrew Filardo, 2007. "Globalisation and inflation: New cross-country evidence on the global determinants of domestic inflation," BIS Working Papers 227, Bank for International Settlements.
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Cited by:
  1. Eickmeier, Sandra & Kühnlenz, Markus, 2013. "China's role in global inflation dynamics," Discussion Papers 07/2013, Deutsche Bundesbank, Research Centre.
  2. Martin T. Bohl & David G. Mayes & Pierre L. Siklos, 2011. "The Quality Of Monetary Policy And Inflation Performance: Globalization And Its Aftermath," Manchester School, University of Manchester, vol. 79(s1), pages 617-645, 06.

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