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Is China "exporting deflation"?

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  • Steven B. Kamin
  • Mario Marazzi
  • John W. Schindler
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    Abstract

    In the past few years, observers increasingly have pointed to China as a source of downward pressure on global prices. This paper evaluates the theoretical and empirical evidence bearing on the question of whether China's buoyant export growth has led to significant changes in the inflation performance of its trading partners. This evidence suggests that the impact of Chinese exports on global prices has been, while non-negligible, fairly modest. On a priori grounds, our theoretical analysis suggests that China's economy is still too small relative to the world economy to have much effect on global inflation: a back-of-the-envelope calculation puts that effect at about 1/3 percentage point in recent years. In terms of the empirical evidence, we identify a statistically significant effect of U.S. imports from China on U.S. import prices, but given the size of this effect and the relatively low share of imports in U.S. GDP, the ultimate impact on the U.S. consumer prices has likely been quite small. Moreover, imports from China had little apparent effect on U.S. producer prices. Finally, using a multi-country database of trade transactions, we estimate that since 1993, Chinese exports lowered annual import inflation in a large set of economies by 1/4 percentage point or less on average, similar to the prediction of our theoretical model.

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    Bibliographic Info

    Paper provided by Board of Governors of the Federal Reserve System (U.S.) in its series International Finance Discussion Papers with number 791.

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    Date of creation: 2004
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    Handle: RePEc:fip:fedgif:791

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    Related research

    Keywords: Exports - China;

    This paper has been announced in the following NEP Reports:

    References

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    1. W. Michael Cox & Jahyeong Koo, 2003. "China: awakening giant," Monograph, Federal Reserve Bank of Dallas, number 2003a.
    2. Jose Campa & Linda S. Goldberg, 1997. "The evolving external orientation of manufacturing: a profile of four countries," Economic Policy Review, Federal Reserve Bank of New York, issue Jul, pages 53-81.
    3. Vincent Hogan, 1998. "Explaining the Recent Behavior of Inflation and Unemployment in the United States," IMF Working Papers 98/145, International Monetary Fund.
    4. Jane Ihrig & Jaime Marquez, 2003. "An empirical analysis of inflation in OECD countries," International Finance Discussion Papers 765, Board of Governors of the Federal Reserve System (U.S.).
    5. Phillip Swagel, 1995. "Import prices and the competing goods effect," International Finance Discussion Papers 508, Board of Governors of the Federal Reserve System (U.S.).
    6. Jorge A. Chan-Lau & Stephen Tokarick, 1999. "Why Has Inflation in the United States Remained so Low? Reassessing the Importance of Labor Costs and the Price of Imports," IMF Working Papers 99/149, International Monetary Fund.
    7. Revenga, Ana L, 1992. "Exporting Jobs? The Impact of Import Competition on Employment and Wages in U.S. Manufacturing," The Quarterly Journal of Economics, MIT Press, vol. 107(1), pages 255-84, February.
    8. W. Michael Cox & Jahyeong Koo, 2003. "China: awakening giant," Southwest Economy, Federal Reserve Bank of Dallas, issue Sep, pages 1-8.
    9. William Testa & Jay Liao & Alexei Zelenev, 2003. "Midwest manufacturing and trade with China," Chicago Fed Letter, Federal Reserve Bank of Chicago, issue Nov.
    10. Rob Valletta, 2003. "Is our IT manufacturing edge drifting overseas?," FRBSF Economic Letter, Federal Reserve Bank of San Francisco, issue oct10.
    11. Geoffrey M.B. Tootell, 1998. "Globalization and U.S. inflation," New England Economic Review, Federal Reserve Bank of Boston, issue Jul, pages 21-33.
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    Cited by:
    1. Michael Funke, 2005. "Inflation in Mainland China - Modelling a Roller Coaster Ride," Quantitative Macroeconomics Working Papers 20507, Hamburg University, Department of Economics.
    2. Robert Anderton & Alessandro Galesi & Marco Lombardi & Filippo di Mauro, . "Key elements of global inflation," Discussion Papers 09/22, University of Nottingham, GEP.
    3. César Calderón & Klaus Schmidt Hebbel, 2008. "What Drives Inflation in the World?," Working Papers Central Bank of Chile 491, Central Bank of Chile.
    4. Hickey, Ronan & Osborne, Jenny, 2004. "The Chinese Economy: Emergence and Evolution," Quarterly Bulletin Articles, Central Bank of Ireland, pages 67-91, July.

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