Inflation Dynamics in Asia: Causes, Changes, and Spillovers From China
IMF Working Papers, November 1, 2011
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Bibliographic details
- Authors: Filiz D Unsal
- Published: November 1, 2011
- Series: IMF Working Papers
- DOI: https://doi.org/10.5089/9781463923969.001
Summary
- The perception that Asia's inflation dynamics is driven by idiosyncratic supply shocks implies little scope for a policy reaction to a build-up of inflationary pressures.
- Asia's fast growth and integration over the last two decades suggest that the drivers of inflation may have changed, with domestic demand pressures possibly playing 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.
- Results indicate that over the past two decades the main drivers of inflation in Asia have been monetary and supply shocks, but 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.
Methodology
- Model: Global VAR (GVAR) model used to quantify inflation dynamics and explicitly incorporate regional and global spillovers.
- Scope: Inflation dynamics in Asia with attention to spillovers from China.
Key Findings
- Main drivers over the past two decades: monetary shocks and supply shocks.
- Recent change: the contribution of monetary and supply shocks has fallen.
- Emerging driver: demand-side pressures have started to emerge as an important contributor to inflation in Asia.
- Implication of prior perception: If inflation were driven mainly by idiosyncratic supply shocks, there would be limited scope for policy reaction to rising inflationary pressures; the findings challenge that corollary by highlighting growing demand-side influence.
Policy Implications and Interpretation
- The shift toward greater demand-driven inflationary pressures implies potentially more scope for policy instruments to react to build-ups in inflationary pressures than would be the case under a purely supply-shock-driven view.
- Accounting for regional and global spillovers (including from China) is important for understanding and formulating policy responses to inflation dynamics in Asia.