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Does Inflation in China Affect the United States and Japan?

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Author Info

  • Luke Willard
  • Tarhan Feyzioglu

Abstract

With China''s share in global trade increasing rapidly, some argued in 2002-03 that China was exporting deflation to other countries as it was dumping cheap goods in mature markets. Later, others argued that China was sucking in commodities and thus causing sharp increases in global prices. The theoretical literature so far has provided mixed conclusions regarding the strength of international transmission of inflation. This paper uses a number of econometric techniques to assess the extent of the link between inflation rates between China and the United States and Japan. It finds only limited empirical evidence at the aggregate level for consumer price inflation in China leading to price changes in the United States and Japan. However, it finds some evidence that inflation in the United States has an impact on Chinese inflation, consistent with the literature that argues that inflation is propagated from the reserve currency economy to other economies. In either case, the impact is short lived. At a more disaggregate level, there appears to be stronger sector-specific linkages between prices in China and in the United States and Japan, both for food and at the household level for manufactured goods.

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Bibliographic Info

Paper provided by International Monetary Fund in its series IMF Working Papers with number 06/36.

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Length: 31
Date of creation: 01 Feb 2006
Date of revision:
Handle: RePEc:imf:imfwpa:06/36

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Related research

Keywords: Trade; Economic models; inflation; inflation rates; price inflation; monetary fund; price level; inflation rate; inflationary pressures; increase in inflation; monetary policy; central bank; monetary economics; retail price inflation; inflation equation; deflationary effect; low inflation; relative prices; effects of inflation; international monetary policy; rise in inflation; retail price index; macroeconomic performance;

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References

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  1. Kollman, R., 1996. "The Exchange Rate in a Dynamic-Optimizing Current Account Model with Nominal Rigidities: a Quantitative Investigation," Cahiers de recherche 9614, Universite de Montreal, Departement de sciences economiques.
  2. Charles Engel & John H. Rogers, 1994. "How Wide is the Border?," NBER Working Papers 4829, National Bureau of Economic Research, Inc.
  3. Cheung, Yin-Wong & Yuen, Jude, 2002. "Effects of U.S. Inflation on Hong Kong and Singapore," Journal of Comparative Economics, Elsevier, vol. 30(3), pages 603-619, September.
  4. Assaf Razin, 2004. "Globalization and Disinflation: A Note," NBER Working Papers 10954, National Bureau of Economic Research, Inc.
  5. Clarida, Richard & Gali, Jordi & Gertler, Mark, 2002. "A simple framework for international monetary policy analysis," Journal of Monetary Economics, Elsevier, vol. 49(5), pages 879-904, July.
  6. Bergin, Paul R., 2003. "Putting the 'New Open Economy Macroeconomics' to a test," Journal of International Economics, Elsevier, vol. 60(1), pages 3-34, May.
  7. Taimur Baig & Jörg Decressin & Tarhan Feyzioglu & Manmohan S. Kumar & Chris Faulkner-MacDonagh, 2003. "Deflation," IMF Occasional Papers 221, International Monetary Fund.
  8. Athanasios Orphanides, 2003. "Historical monetary policy analysis and the Taylor rule," Finance and Economics Discussion Series 2003-36, Board of Governors of the Federal Reserve System (U.S.).
  9. Jonathan McCarthy, 2007. "Pass-Through of Exchange Rates and Import Prices to Domestic Inflation in Some Industrialized Economies," Eastern Economic Journal, Eastern Economic Association, vol. 33(4), pages 511-537, Fall.
  10. Crowder, William J., 1996. "The international convergence of inflation rates during fixed and floating exchange rate regimes," Journal of International Money and Finance, Elsevier, vol. 15(4), pages 551-575, August.
  11. Nikolay Gueorguiev, 2003. "Exchange Rate Pass-Through in Romania," IMF Working Papers 03/130, International Monetary Fund.
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Citations

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Cited by:
  1. 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.
  2. Raphael Auer & Andreas M. Fischer, 2008. "The effect of trade with low-income countries on U.S. industry," Globalization and Monetary Policy Institute Working Paper 14, Federal Reserve Bank of Dallas.
  3. Auer, Raphael & Fischer, Andreas M., 2010. "The effect of low-wage import competition on U.S. inflationary pressure," Journal of Monetary Economics, Elsevier, vol. 57(4), pages 491-503, May.
  4. Denise Côté & Carlos de Resende, 2008. "Globalization and Inflation: The Role of China," Working Papers 08-35, Bank of Canada.
  5. 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.
  6. Eickmeier, Sandra & Kühnlenz, Markus, 2013. "China's role in global inflation dynamics," Discussion Papers 07/2013, Deutsche Bundesbank, Research Centre.

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