Emerging Economies' Supply Shocks and Japan's Price Deflation: International Transmissions in a Three-Country DSGE Model

Naohisa Hirakata, Yuto Iwasaki and Masahiro Kawai ()
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Naohisa Hirakata: Asian Development Bank Institute

No 459, ADBI Working Papers from Asian Development Bank Institute

Abstract: This paper examines the international transmission effects that a positive supply shock in emerging economies may have on inflation in developed economies. A three-country dynamic stochastic general equilibrium (DSGE) model is constructed to 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, Japan and the United States (US). The assumed asymmetric trade structures among the three countries and the PRC's choice of exchange rate regime appear to 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 US-dollar-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.

Keywords: supply shocks; emerging economies; trade structure; exchange rate regimes; three-country DSGE model (search for similar items in EconPapers)
JEL-codes: F32 F41 F44 F47 (search for similar items in EconPapers)
Pages: 39 pages
Date: 2014-02-07
New Economics Papers: this item is included in nep-dge, nep-int, nep-mon, nep-opm, nep-sea and nep-sog
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Citations: View citations in EconPapers (14)

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Related works:
Working Paper: Emerging Economies’ Supply Shocks and Japan’s Price Deflation: International Transmissions in a Three-Country DSGE Model (2014)
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