Hostname: page-component-cd9895bd7-lnqnp Total loading time: 0 Render date: 2024-12-23T08:20:28.248Z Has data issue: false hasContentIssue false
  • English
  • Français

CHINA'S ROLE IN GLOBAL INFLATION DYNAMICS

Published online by Cambridge University Press:  28 September 2016

Sandra Eickmeier  and
Markus Kühnlenz
Sandra Eickmeier*
Affiliation:
Deutsche Bundesbank
Markus Kühnlenz
Affiliation:
Deutsche Bundesbank
*
Address correspondence to: Sandra Eickmeier, Deutsche Bundesbank, Wilhelm-Epstein-Str. 14, 60431 Frankfurt, Germany; e-mail: [email protected].
Get access Rights & Permissions [Opens in a new window]

Abstract

We apply a structural dynamic factor model to a large quarterly data set covering 38 countries between 2002 and 2011 to analyze China's role in global inflation dynamics. We identify Chinese supply and demand shocks and examine their contributions to global price dynamics and the transmission mechanism. Our main findings are as follows: (i) Chinese supply and demand shocks affect prices in other countries significantly. Demand shocks matter slightly more than supply shocks. Producer prices tend to be more strongly affected than consumer prices by Chinese shocks. The overall share of international inflation explained by Chinese shocks is notable (about 6 percent on the average over all countries but not more than 13 percent in each region). (ii) Direct channels (via import and export prices) and indirect channels (via greater exposure to foreign competition and commodity prices) both matter. (iii) Differences in trade and in commodity exposure help explain cross-country differences in price responses.

Keywords

Global InflationChinaStructural Dynamic Factor Model
Type
Articles
Information
Macroeconomic Dynamics , Volume 22 , Issue 2 , March 2018 , pp. 225 - 254
Copyright
Copyright © Cambridge University Press 2016 

Access options

Get access to the full version of this content by using one of the access options below. (Log in options will check for institutional or personal access. Content may require purchase if you do not have access.)

Footnotes

We wish to thank Knut Are Aastveit, Heinz Herrmann, Ulf Slopek, Mu-Chun Wang, and two anonymous referees as well as the participants of a joint Norges Bank-Bundesbank workshop, of the 4th workshop on Money, Macro and Finance in East Asia and of a seminar at the Reserve Bank of Australia for very helpful comments and discussions. The opinions expressed in this paper are those of the authors and do not necessarily reflect the views of the Deutsche Bundesbank.

References

REFERENCES

Aastveit, Knut A., Bjørnland, Hilde C., and Thorsrud, Leif A. (2015) What drives oil prices? Emerging versus developed economies. Journal of Applied Econometrics 30 (7), 1013–1028.Google Scholar
Asian Development Bank (2011) Asian Development Outlook, p. 23.Google Scholar
Backus, David K., Kehoe, Patrick J., and Kydland, Finn E. (1992) International real business cycles. Journal of Political Economy 100 (4), 745–775.Google Scholar
Bai, Jushan and Ng, Serena (2002) Determining the number of factors in approximate factor models. Econometrica 70, 191–221.Google Scholar
Bernanke, Ben S., Boivin, Jean, and Eliasz, Piotr (2005) Measuring the effects of monetary policy: A factor-augmented vector autoregressive (FAVAR) approach. Quarterly Journal of Economics 120, 387–422.Google Scholar
Bianchi, Francesco and Civelli, Andrea (2015) Globalization and inflation: Evidence from the time-varying VAR. Review of Economic Dynamics 18 (2), 406–433.Google Scholar
Boivin, Jean and Ng, Serena (2006) Are more data always better for factor analysis? Journal of Econometrics 132, 169–194.Google Scholar
Borio, Claudio E.V. and Filardo, Andrew J. (2007) Globalization and Inflation: New Cross-Country Evidence on the Global Determinants of Domestic Inflation. BIS working paper 227.Google Scholar
Buch, Claudia, Eickmeier, Sandra, and Prieto, Esteban (2014) Macroeconomic factors and microlevel bank behavior. Journal of Money, Credit and Banking 46 (4), 715–751.Google Scholar
Cesa-Bianchi, Ambrogio, Pesaran, Hashem, Rebucci, Alessandro, and Xu, TengTeng (2012) China's emergence in the world economy and business cycles. Economia, Journal of the Latin American and Caribbean Economic Association 12 (2), 1–75.Google Scholar
Chamberlain, Gary and Rothschild, Michael (1983) Arbitrage, factor structure, and mean–variance analysis on large asset markets. Econometrica 51, 1281–1304.Google Scholar
Ciccarelli, Matteo and Mojon, Benoit (2010) Global inflation. Review of Economics and Statistics 92 (3), 524–535.Google Scholar
Côté, Denise and De Resende, Carlos (2008) Globalization and Inflation: The Role of China. Bank of Canada working paper 2008–35.Google Scholar
Eickmeier, Sandra (2009) Comovements and heterogeneity in the Euro area analyzed in a nonstationary factor dynamic model. Journal of Applied Econometrics 24, 933–959.CrossRefGoogle Scholar
Eickmeier, Sandra and Kühnlenz, Markus (2013) China's Role in Global Inflation Dynamics. Deutsche Bundesbank discussion paper 07/2013.Google Scholar
Eickmeier, Sandra and Ng, Tim (2015) How do credit supply shocks propagate internationally? A GVAR approach. European Economic Review 74, 128–145.Google Scholar
Eickmeier, Sandra and Pijnenburg, Katharina (2013) The global dimension of inflation—Evidence from factor-augmented Phillips curves. Oxford Bulletin of Economics and Statistics 74, 103–122.CrossRefGoogle Scholar
Farrant, Katie and Peersman, Gert (2006) Is the exchange rate a shock absorber or a source of shocks? New empirical evidence. Journal of Money, Credit and Banking 38 (4), 939–961.Google Scholar
Feldkircher, Martin and Korhonen, Iikka (2014) The rise of China and its implications for emerging markets—Evidence from a GVAR model. Pacific Economic Review 19 (1), 61–89.Google Scholar
Feyzioglu, Tarhan and Willard, Luke (2006) Does Inflation in China Affect the United States and Japan? IMF working paper 06/36.Google Scholar
Forni, Mario, Hallin, Marc, Lippi, Marco, and Reichlin, Lucrezia (2000) The generalized dynamic-factor model: Identification and estimation. Review of Economics and Statistics 82, 540–554.Google Scholar
Fry, Renee and Pagan, Adrian (2007) Some Issues in Using Sign Restrictions for Identifying Structural VARs. NCER working paper 14.Google Scholar
Fry, Renee and Pagan, Adrian (2011) Sign restrictions in structural vector autoregressions: A critical review. Journal of Economic Literature 49 (4), 938–960.Google Scholar
Furlanetto, Francesco, Ravazzolo, Francesco, and Sarferaz, Samad (2014) Identification of Financial Factors in Economic Fluctuations. KOF working paper 364.Google Scholar
Kamin, Steven B., Marazzi, Mario, and Schindler, John W. (2006) The impact of Chinese exports on global import prices. Review of International Economics 14, 179–201.Google Scholar
Kilian, Lutz (1997) Small-sample confidence intervals for impulse response functions. Review of Economics and Statistics 80, 218–230.Google Scholar
Kilian, Lutz (2009) Not all oil price shocks are alike: Disentangling demand and supply shocks in the crude oil market. American Economic Review 99 (3), 1053–1069.Google Scholar
Krugman, Paul (1991) Geography and Trade. Cambridge, MA: MIT Press.Google Scholar
Kumar, Manmohan, Taimur, Baig, Decressin, Joerg, Faulkner-MacDonagh, Chris, and Feyziogulu, Tarhan (2003) Deflation: Determinants, Risks, and Policy-Option-Findings of an Interdepartmental Task Force. IMF occasional paper 221.Google Scholar
Li, Hongbin, Li, Lei, Wu, Binzhen, and Xiong, Yanyan (2012) The end of cheap Chinese labor. Journal of Economic Perspectives 26 (4), 57–74.Google Scholar
Mandel, Benjamin R. (2013) Chinese Exports and U.S. Import Prices. Federal Reserve Bank of New York staff report 591.Google Scholar
Morel, Louis (2007) The Direct Effect of China on Canadian Consumer Prices: An Empirical Assessment. Bank of Canada discussion paper 10.Google Scholar
Mumtaz, Haroon and Surico, Paolo (2012) Evolving international inflation dynamics: World and country-specific factors. Journal of the European Economic Association 10, 716–734.Google Scholar
OECD (2012) Economic Policy Reforms 2012: Going for Growth. Paris: OECD Publishing.Google Scholar
Osorio, Carolina and Unsal, D. Filiz (2013) Inflation dynamics in Asia: Causes, changes, and spillovers from China. Journal of Asian Economics 24, 26–40.Google Scholar
Peersman, Gert (2005) What caused the early millennium slowdown? Evidence based on vector autoregressions. Journal of Applied Econometrics 20, 185–207.Google Scholar
Peersman, Gert and Straub, Roland (2009) Technology shocks and robust sign restrictions in a Euro area SVAR. International Economic Review 50 (3), 727–750.CrossRefGoogle Scholar
Roache, Shaun K. (2012) China's Impact on World Commodity Markets. IMF working paper 12/115.Google Scholar
Rubio-Ramirez, Juan F, Waggoner, Daniel F, and Zha, Tao (2010) Structural vector autoregressions: Theory of identification and algorithms for inference. Review of Economic Studies 77 (2), 665–696.Google Scholar
Samuelson, Paul A. (2004) Where Ricardo and Mill rebut and confirm arguments of mainstream economists supporting globalization. Journal of Economic Perspectives 18 (3), 135–146.CrossRefGoogle Scholar
Smets, Frank and Wouters, Raf (2003) An estimated dynamics stochastic general equilibrium model of the Euro area. Journal of the European Economic Association 1, 1123–1175.CrossRefGoogle Scholar
Smets, Frank and Wouters, Raf (2005) Comparing shocks and frictions in US and Euro area business cycles: A Bayesian DSGE approach. Journal of Applied Econometrics 20 (2), 161–183.Google Scholar
Song, Zheng, Storesletten, Kjetil, and Zilibotti, Fabrizio (2011) Growing like China. American Economic Review 101, 202–241.Google Scholar
Stock, James H. and Watson, Mark W. (2002) Forecasting using principal components from a large number of predictors. Journal of the American Statistical Association 97, 1167–1179.Google Scholar
Stock, James H. and Watson, Mark W. (2002) Macroeconomic forecasting using diffusion indexes. Journal of Business and Economic Statistics 20, 147–162.Google Scholar
Stock, James H. and Watson, Mark W. (2005) Implications of Dynamic Factor Models for VAR Analysis. NBER working paper 11467.CrossRefGoogle Scholar
Zhu, Xiaodong (2012) Understanding China's growth: Past, present, and future. Journal of Economic Perspectives 26 (4), 103–124.Google Scholar