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The Role of Global and Domestic Shocks for In flation Dynamics: Evidence from Asia

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  • David Finck

    () (Justus-Liebig-University Giessen)

  • Peter Tillmann

    () (Justus-Liebig-University Giessen)

Abstract

This paper studies the determinants of business cycles in small open economies and adds to the discussion about the changing nature of in flation dynamics. We estimate a series of VAR models for a set of six Asian emerging market economies, in which we identify a battery of domestic and global shocks using sign restrictions. We find that global shocks explain large parts of infl ation and output dynamics. The global shocks are procyclical with respect to the domestic components of economic activity. We estimate Phillips curve regressions based on alternative decompositions of output into global and domestic components. For the domestic component of GDP we find a positive and significant Phillips curve slope. While the output component driven by oil prices 'fl attens' the Phillips curve, the component driven by global demand shocks 'steepens' the trade-off. Hence, whether or not global shocks fl atten the Phillips curve crucially depends on the nature of these global shocks. A series of counterfactuals supports these findings and suggests that the role of monetary policy and exchange rate shocks is limited.

Suggested Citation

  • David Finck & Peter Tillmann, 2019. "The Role of Global and Domestic Shocks for In flation Dynamics: Evidence from Asia," MAGKS Papers on Economics 201904, Philipps-Universität Marburg, Faculty of Business Administration and Economics, Department of Economics (Volkswirtschaftliche Abteilung).
  • Handle: RePEc:mar:magkse:201904
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    References listed on IDEAS

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    More about this item

    Keywords

    infl ation targeting; business cycle; open economy; monetary policy; Phillips curve;

    JEL classification:

    • E3 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles
    • E5 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit
    • F4 - International Economics - - Macroeconomic Aspects of International Trade and Finance

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