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Trade Structure and Transmission of Inflation: Theory and Japanese Experience

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  • Jongmoo Jay Choi
  • M. Ishaq Nadiri
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    Abstract

    The international price linkage in a single commodity model can be explained trivially by the law of one price or the quantity theory of money. In this paper, we formulate a simple sectoral, general equilibrium model with money. The transmission of price pressures from the world market to nontradable sectors of a domestic economy depends on industry structure, and the size of the direct price substitution effect and the indirect money and income effect through the balance of payments. The structural model is then empirically implemented for Japan, 1956-77. Various dynamic simulations conducted show both the overall magnitude of imported inflation and the relative importance of three major channels of transmission (price, money and income) in Japanese inflation during the period covered. These results imply that closing of one channel of transmission such as the monetary channel by a completely sterilizing monetary policy does not insulate the domestic economy from foreign price disturbances.

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    Bibliographic Info

    Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 0923.

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    Date of creation: Jun 1982
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    Handle: RePEc:nbr:nberwo:0923

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    1. Brunner, Karl & Meltzer, Allan H, 1977. "The Explanation of Inflation: Some International Evidence," American Economic Review, American Economic Association, vol. 67(1), pages 148-54, February.
    2. Martin F.J. Prachowny, 1972. "The Effectiveness of Stabilization Policy in a Small Open Economy," Working Papers 77, Queen's University, Department of Economics.
    3. Ronald W. Jones & W. Max Corden, 1976. "Devaluation, Non-Flexible Prices, and the Trade Balance for a Small Country," Canadian Journal of Economics, Canadian Economics Association, vol. 9(1), pages 150-61, February.
    4. Turnovsky, Stephen J, 1976. "The Relative Stability of Alternative Exchange Rate Systems in the Presence of Random Disturbances," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 8(1), pages 29-50, February.
    5. Michael R. Darby, 1979. "The NBER International Transmission Model: The Mark II Disequilibrium Version, Estimates and Lessons," UCLA Economics Working Papers 137, UCLA Department of Economics.
    6. Branson, William H, 1975. "Monetarist and Keynesian Models of the Transmission of Inflation," American Economic Review, American Economic Association, vol. 65(2), pages 115-19, May.
    7. Houthakker, Hendrik S & Magee, Stephen P, 1969. "Income and Price Elasticities in World Trade," The Review of Economics and Statistics, MIT Press, vol. 51(2), pages 111-25, May.
    8. Stephen J. Turnovsky & Andre Kaspura, 1974. "An Analysis of Imported Inflation in a Short-Run Macroeconomic Model," Canadian Journal of Economics, Canadian Economics Association, vol. 7(3), pages 355-80, August.
    9. Katseli-Papaefstratiou, Louka T., 1980. "Transmission of external price disturbances and the composition of trade," Journal of International Economics, Elsevier, vol. 10(3), pages 357-375, August.
    10. Shinkai, Yoichi, 1973. "A Model of Imported Inflation," Journal of Political Economy, University of Chicago Press, vol. 81(4), pages 962-71, July-Aug..
    11. Irving B. Kravis & Robert E. Lipsey, 1977. "Price Behavior in the Light of Balance of Payments Theories," NBER Working Papers 0181, National Bureau of Economic Research, Inc.
    12. Dornbusch, Rudi, 1996. "The Effectiveness of Exchange-Rate Changes," Oxford Review of Economic Policy, Oxford University Press, vol. 12(3), pages 26-38, Autumn.
    13. Samuel I. Katz, 1973. "'Imported inflation' and the balance of payments," International Finance Discussion Papers 32, Board of Governors of the Federal Reserve System (U.S.).
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