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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: sandra.eickmeier@bundesbank.de.
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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 

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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.

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