Does China have Inflationary Effects on the USA and Japan?

Authors


  • The authors would like to thank Jahangir Aziz, Ray Brooks, Robert Flood, Eswar Prasad, and colleagues at the Reserve Bank of Australia for useful comments. This paper was done while the second author was at the International Monetary Fund, Princeton University, and the Reserve Bank of Australia. The views expressed in this paper are those of the authors and should not be attributed to the International Monetary Fund, the OECD, or the Reserve Bank of Australia.

Abstract

With China's share in global trade increasing rapidly, some argued in 2002-2003 that China was exporting deflation to other countries as it was dumping cheap goods in mature markets. Later, others argued that China was causing sharp increases in global prices. This paper uses several econometric techniques to assess the extent of the link between inflation rates between China and the USA and Japan. Only limited empirical evidence at the aggregate level is found for consumer price inflation in China leading to price changes in the USA and Japan. However, there is some evidence that inflation in the USA has an impact on Chinese inflation. The results seem consistent with the Federal Reserve and the Bank of Japan being concerned about inflation and, hence, adjusting policy such that inflation shocks have no significant effect on overall inflation. Recent Chinese price rises are unlikely to have a material effect on the USA or Japan.

Ancillary