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The trade-inflation nexus: The role of production networks

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  • Duong, Thuy Hang
  • Liu, Weifeng Larry

Abstract

From the 1990s until the COVID-19 pandemic, the world experienced a sustained period of low and stable inflation, alongside a marked increase in trade integration among countries. This paper examines the impacts of international trade on inflation through domestic production networks. We first construct a theoretical model of an open economy to illustrate how domestic input–output networks propagate the price impacts of trade shocks. Using Australia as a case study, we find that the network impacts of trade shocks on inflation are as significant as their direct impacts, and primarily propagate upstream, based on data from 47 manufacturing industries from 2000 to 2023. Australia’s low inflation before COVID benefited from increased exposure to China’s low-cost exports, while inflation surged during episodes of global supply chain disruptions, among other factors. This paper underscores the importance of economic globalization and production structures for inflation, and offers several implications for monetary and trade policies.

Suggested Citation

  • Duong, Thuy Hang & Liu, Weifeng Larry, 2026. "The trade-inflation nexus: The role of production networks," Journal of International Money and Finance, Elsevier, vol. 161(C).
    • Handle: RePEc:eee:jimfin:v:161:y:2026:i:c:s0261560625002190
    DOI: 10.1016/j.jimonfin.2025.103484
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    Keywords

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    JEL classification:

    • C67 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Input-Output Models
    • D57 - Microeconomics - - General Equilibrium and Disequilibrium - - - Input-Output Tables and Analysis
    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • F13 - International Economics - - Trade - - - Trade Policy; International Trade Organizations
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics

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