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Inflation Dynamics in Asia: Causes, Changes, and Spillovers from China

Author/Editor: Osorio, Carolina | Unsal, D. Filiz
Authorized for Distribution: November 1, 2011
Electronic Access: Free Full Text (PDF file size is 1,423KB)
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Disclaimer: This Working Paper should not be reported as representing the views of the IMF. The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate.

Summary: The perception that Asia’s inflation dynamics is driven by idiosyncratic supply shocks implies, as a corollary, that there is little scope for a policy reaction to a build-up of inflationary pressures. However, Asia’s fast growth and integration over the last two decades suggest that the drivers of inflation may have changed, and that domestic demand pressures may now play a larger role than in the past. This paper presents a quantitative analysis of inflation dynamics in Asia using a Global VAR (GVAR) model, which explicitly incorporates the role of regional and global spillovers in driving Asia’s inflation. Our results suggest that over the past two decades the main drivers of inflation in Asia have been monetary and supply shocks, but also that, in recent years, the contribution of these shocks has fallen, whereas demand-side pressures have started to emerge as an important contributor to inflation in Asia.
 
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Series: Working Paper No. 11/257
Subject(s): Asia | China | Commodity prices | Cross country analysis | Demand | Economic models | Inflation | Spillovers
Author's keyword(s): Inflation | Global VAR (GVAR) | Monetary Policy
 
English  
    Published:   November 1, 2011        
            Format:   Paper
    Stock No:   WPIEA2011257   Pages:   20
    Price:   US$18.00 (Academic Rate: US$18.00 )
       
     
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