ABSTRACT
The increasing importance of China in the world economy has given rise to explanations of inflation in the industrial and emerging markets that emphasize the role of price impulses in China for the low inflation in the first several years of the twenty-first century and for the build up more recently. In the case of East Asia, an additional explanation for the low inflation subsequent to the crisis in 1997-8 has centered on the role of the crisis itself as well as on the consequences of different monetary policy choices in the post-crises period. This paper is a contribution to the analysis of these questions. Section 1 sets the stage by recalling themain features of the inflation experiences in the region and presenting some preliminary evidence on the importance of external influences. Section 2 reviews some recent crosscountry evidence from the literature, which suggests that the inflation process in the region can be understood in terms of an inflation equation driven by a relatively conventional open economy Phillips curve relationship combined with an aggregate demand relationship in which external demand has an important effect. Section 3 reports the results from an empirical analysis based on estimated vector auto regression models which attempts to isolate the role of world-wide shocks as opposed to shocks originating in China for the smaller countries in the region, and which discusses differences in the responses of individual countries to external events. Section 4 summarizes and concludes.
