Tailwinds and Headwinds: How Does Growth in the BRICs Affect Inflation in the G-7?
by Anna Lipínskaa and Stephen Millardb
In this paper, we analyze the impact of a persistent productivity
increase in a set of countries - which we think of as
the economies of Brazil, Russia, India, and China (BRIC) - on
inflation in their trading partners, the Group of Seven (G-7). In
particular, we want to understand the conditions under which
this shock can lead to tailwinds or headwinds in the economies
of trading partners. We build a three-country dynamic stochastic
general equilibrium (DSGE) model in which there are
two oil-importing countries (home and foreign) and one oil-exporting
country. In our benchmark calibration, we find that
the tailwind effect, lowering inflation in the home economy,
dominates the headwind effect. However, if the oil demand
elasticity is low (equal to the empirical short-run estimate) or
the labor market is flexible, inflation at home rises in the subsequent
periods as a result of the foreign productivity shock.
JEL Codes: E12, F41, E31.
(PDF, 40 pages 880 kb)
Discussion by Paul Beaudry
a Federal Reserve Board
b Bank of England and Durham Business School