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Emerging Economies' Supply Shocks and Japan's Price Deflation: International Transmissions in a Three-Country DSGE Model

Author

Listed:
  • Naohisa Hirakata

    (Asian Development Bank Institute)

  • Yuto Iwasaki

    (Asian Development Bank Institute)

  • Masahiro Kawai

    (Asian Development Bank Institute)

Abstract

This paper examines the international transmission effects that a positive supply shock in emerging economies may have on inflation in developed economies. A three-country dynamic stochastic general equilibrium (DSGE) model is constructed to analyze the impact of a supply shock in an emerging economy, the People's Republic of China (PRC), on inflation rates in two developed economies, Japan and the United States (US). The assumed asymmetric trade structures among the three countries and the PRC's choice of exchange rate regime appear to influence the international transmission of a supply shock in the PRC. Specifically, Japan is under a greater deflationary pressure than the US because of its vertical trade specialization vis-à-vis the PRC and the PRC's US-dollar-pegged regime. This outcome suggests that, even though Japan and the US may face common positive supply shocks from emerging economies, the deflationary impact of the shock is greater for Japan.

Suggested Citation

  • Naohisa Hirakata & Yuto Iwasaki & Masahiro Kawai, 2014. "Emerging Economies' Supply Shocks and Japan's Price Deflation: International Transmissions in a Three-Country DSGE Model," ADBI Working Papers 459, Asian Development Bank Institute.
    • Handle: RePEc:ris:adbiwp:0459
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    References listed on IDEAS

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    Cited by:

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    5. Nispi Landi, Valerio, 2020. "Capital controls spillovers," Journal of International Money and Finance, Elsevier, vol. 109(C).

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    JEL classification:

    • F32 - International Economics - - International Finance - - - Current Account Adjustment; Short-term Capital Movements
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics
    • F44 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - International Business Cycles
    • F47 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Forecasting and Simulation: Models and Applications

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