Emerging Economies’ Supply Shocks and Japan’s Price Deflation: International Transmissions in aThree-Country DSGE Model
Hirakata, Naohisa; Iwasaki, Yuto; Kawai, Masahiro | February 2014
Abstract
This paper examines the international transmission effects that a positive supply shock in emerging economies may have on inflation in developed economies. We construct a dynamic stochastic general equilibrium (DSGE) model for three countries and analyze the impact of a supply shock in an emerging economy, the People’s Republic of China (PRC), on inflation rates in two developed economies, the United States (US) and Japan. We demonstrate that the assumed asymmetric trade structures among the three countries and the PRC’s choice of exchange rate regime influence the international transmission of a supply shock in the PRC. Specifically, Japan is under a greater deflationary pressure than the US because of its vertical trade specialization vis-à-vis the PRC and the PRC’s USdollar-pegged regime. This outcome suggests that, even though Japan and the US may face common positive supply shocks from emerging economies, the deflationary impact of the
shock is greater for Japan.
Citation
Hirakata, Naohisa; Iwasaki, Yuto; Kawai, Masahiro. 2014. Emerging Economies’ Supply Shocks and Japan’s Price Deflation: International Transmissions in aThree-Country DSGE Model. © Asian Development Bank Institute. http://hdl.handle.net/11540/1221. License: CC BY-NC-ND 3.0 IGO.Keywords
Economic Development
Economic Infrastructure
Economic Policies
Regional Economic Development
Microfinance Programs
Public Finance
Local Financing
Financial Stability
Financial Sector Regulation
Enterprises
Financial aid
Economies in transition
Local Finance
Local Government
Insurance Companies
Banks
Social Equity
Social responsibility of business
Accounting
Personal budgets
Cost and standard of living
Bank accounts
Credit control
Regulatory reform
Banks and banking
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