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Tailwinds and headwinds: how does growth in the BRICs affect inflation in the G7?

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  • Lipinska, Anna

    ()
    (Bank of England)

  • Millard, Stephen

    ()
    (Bank of England)

Abstract

In this paper, we analyse the impact of a persistent productivity increase in a set of countries – which we think of as the BRIC economies – on inflation in their trading partners, the G7. In particular we want to understand conditions under which this shock can lead to tailwinds or headwinds in the economies of trading partners. We build a three-country DSGE model in which there are two oil-importing countries (home and foreign) and one oil-exporting country. We perform several experiments where we try to disentangle the importance of different factors that can shape inflation dynamics in the home country when the foreign country is hit by a persistent productivity shock. These factors are wage stickiness, the role of the oil sector and its share in both consumption and production, foreign monetary policy and the degree of completeness of financial markets. We find that the tailwinds effect, lowering inflation in the home economy, dominates the headwinds effect as long as there is scope for borrowing and lending across countries and the foreign country’s production is not too oil intensive.

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Bibliographic Info

Paper provided by Bank of England in its series Bank of England working papers with number 420.

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Length: 30 pages
Date of creation: 15 Apr 2011
Date of revision:
Handle: RePEc:boe:boeewp:0420

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  1. Argia M. Sbordone, 2008. "Globalization and inflation dynamics: the impact of increased competition," Staff Reports 324, Federal Reserve Bank of New York.
  2. 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.
  3. Gianluca Benigno & Pierpaolo Benigno, 2003. "Price Stability in Open Economies," Review of Economic Studies, Oxford University Press, vol. 70(4), pages 743-764.
  4. Martin Bodenstein & Christopher J. Erceg & Luca Guerrieri, 2007. "Oil shocks and external adjustment," International Finance Discussion Papers 897, Board of Governors of the Federal Reserve System (U.S.).
  5. Pierpaolo Benigno, 2008. "Price stability with imperfect financial integration," Proceedings, Board of Governors of the Federal Reserve System (U.S.).
  6. Lutz Kilian, 2009. "Not All Oil Price Shocks Are Alike: Disentangling Demand and Supply Shocks in the Crude Oil Market," American Economic Review, American Economic Association, vol. 99(3), pages 1053-69, June.
  7. Alessia Campolmi, 2009. "Oil price shocks: Demand vs Supply in a two-country," 2009 Meeting Papers 877, Society for Economic Dynamics.
  8. 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.
  9. Gianluca Benigno & Pierpaolo Benigno & Fabio Ghironi, 2000. "Interest Rate Rules for Fixed Exchange Rate Regimes," Boston College Working Papers in Economics 468, Boston College Department of Economics, revised 13 Oct 2003.
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Cited by:
  1. 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.
  2. 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.
  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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