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Exchange and interest rate channels during a deflationary era - Evidence from Japan, Hong Kong and China

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Abstract

We examine the role of the exchange and interest rate channels during recent deflation episodes in Japan, Hong Kong and China. We estimate open-economy structural vector autoregressive (SVAR) models for the three economies with different monetary regimes and varying degrees of openness. In both Japan and Hong Kong, shocks to the nominal effective exchange rate have a statistically significant impact on prices, with a notably stronger effect in Hong Kong. Our results provide evidence about the role of external influences in the deflation episodes of these economies, and could also be seen to weakly support suggestions to depreciate the currency in order to escape from a liquidity trap. The importance of the interest rate channel is also found to be high in Japan and Hong Kong. In China, where interest rates have not been an important monetary policy tool, neither exchange nor interest rate shocks significantly influence price developments.

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Bibliographic Info

Paper provided by Bank of Finland, Institute for Economies in Transition in its series BOFIT Discussion Papers with number 17/2005.

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Length: 58 pages
Date of creation: 30 Dec 2005
Date of revision:
Handle: RePEc:hhs:bofitp:2005_017

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Keywords: deflation; zero lower bound; SVAR;

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Cited by:
  1. repec:wyi:journl:002199 is not listed on IDEAS
  2. Reade, J. James & Volz, Ulrich, 2010. "Chinese monetary policy and the dollar peg," Discussion Papers 2010/35, Free University Berlin, School of Business & Economics.
  3. Shin-ichi Fukuda & Junji Yamada, 2012. "Why Did Large-scale Deflation Occur? What Did It Bring About?: From Hong Kong's Experiences in the First Half of the 2000s," Public Policy Review, Policy Research Institute, Ministry of Finance Japan, vol. 8(1), pages 93-122, June.
  4. Mala Raghavan & George Athanasopoulos & Param Silvapulle, 2009. "VARMA models for Malaysian Monetary Policy Analysis," Monash Econometrics and Business Statistics Working Papers 6/09, Monash University, Department of Econometrics and Business Statistics.
  5. Eric Monnet, 2012. "Monetary policy without interest rates. Evidence from France’s Golden Age (1948-1973) using a narrative approach," Working Papers 0032, European Historical Economics Society (EHES).
  6. Koivu, Tuuli, 2012. "Monetary policy, asset prices and consumption in China," Economic Systems, Elsevier, vol. 36(2), pages 307-325.
  7. Hachicha, Ahmed & Bates, Samuel, 2009. "Empirical Analysis of Monetary Transmission in Tunisia: What do SVAR Models Tell Us?," Economics Papers from University Paris Dauphine 123456789/269, Paris Dauphine University.
  8. Narayan, Seema, 2013. "A structural VAR model of the Fiji Islands," Economic Modelling, Elsevier, vol. 31(C), pages 238-244.
  9. Koivu, Tuuli, 2008. "Has the Chinese economy become more sensitive to interest rates? Studying credit demand in China," BOFIT Discussion Papers 1/2008, Bank of Finland, Institute for Economies in Transition.
  10. Mehrotra, Aaron & Koivu, Tuuli & Nuutilainen, Riikka, 2008. "McCallum rule and Chinese monetary policy," BOFIT Discussion Papers 15/2008, Bank of Finland, Institute for Economies in Transition.
  11. He, Qing & Leung, Pak-Ho & Chong, Terence Tai-Leung, 2013. "Factor-augmented VAR analysis of the monetary policy in China," China Economic Review, Elsevier, vol. 25(C), pages 88-104.
  12. Mehrotra, Aaron & Kozluk , Tomasz, 2008. "The Impact of Chinese Monetary Policy Shocks on East Asia," BOFIT Discussion Papers 5/2008, Bank of Finland, Institute for Economies in Transition.
  13. Bhattarai, Keshab & Mallick, Sushanta, 2013. "Impact of China's currency valuation and labour cost on the US in a trade and exchange rate model," The North American Journal of Economics and Finance, Elsevier, vol. 25(C), pages 40-59.

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