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Does Inflation in China Affect the United States and Japan?

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  • 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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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. Clarida, Richard & Galí, Jordi & Gertler, Mark, 2002. "A Simple Framework for International Monetary Policy Analysis," CEPR Discussion Papers, C.E.P.R. Discussion Papers 3355, C.E.P.R. Discussion Papers.
  2. 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.
  3. Yin-Wong Cheung & Jude Yuen, 2002. "Effects of U.S. Inflation on Hong Kong and Singapore," CESifo Working Paper Series 700, CESifo Group Munich.
  4. Nikolay Gueorguiev, 2003. "Exchange Rate Pass-Through in Romania," IMF Working Papers 03/130, International Monetary Fund.
  5. Kollman, R., 1996. "The Exchange Rate in a Dynamic-Optimizing Current Account Model with Nominal Rigidities: a Quantitative Investigation," Cahiers de recherche, Universite de Montreal, Departement de sciences economiques 9614, Universite de Montreal, Departement de sciences economiques.
  6. Charles Engel & John H. Rogers, 1994. "How Wide is the Border?," NBER Working Papers 4829, National Bureau of Economic Research, Inc.
  7. Bergin, Paul R., 2003. "Putting the 'New Open Economy Macroeconomics' to a test," Journal of International Economics, Elsevier, Elsevier, vol. 60(1), pages 3-34, May.
  8. Orphanides, Athanasios, 2003. "Historical monetary policy analysis and the Taylor rule," Journal of Monetary Economics, Elsevier, Elsevier, vol. 50(5), pages 983-1022, July.
  9. Razin, Assaf, 2005. "Globalization and Disinflation: A Note," CEPR Discussion Papers, C.E.P.R. Discussion Papers 4826, C.E.P.R. Discussion Papers.
  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, Elsevier, vol. 15(4), pages 551-575, August.
  11. John H. Rogers, 2001. "Price level convergence, relative prices, and inflation in Europe," International Finance Discussion Papers, Board of Governors of the Federal Reserve System (U.S.) 699, Board of Governors of the Federal Reserve System (U.S.).
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Citations

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

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