Exchange and interest rate channels during a deflationary era : evidence from Japan, Hong Kong and China

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Title: Exchange and interest rate channels during a deflationary era : evidence from Japan, Hong Kong and China
Author: Mehrotra, Aaron
Organization: Bank of Finland
Department / Unit: Institute for Economies in Transition (BOFIT)
Series: BOFIT Discussion Papers
Series number: 17/2005
Year of publication: 2005
Publication date: 5.12.2005
Published in: Published in Journal of Comparative Economics, March 2007, Vol. 35, No 1, pp. 188-210
Pages: 49 s.
Keywords: välittymismekanismit; rahapolitiikka; korot; valuuttakurssit; Japani; deflaatio; hinnat; Kiina; Bofit-kokoelma; Hong Kong; SVAR
JEL: E31; F41
Abstract: We examine the role of the exchange and interest rate channels during recent deflation episodes in Japan, Hong Kong and China.We estimate open-economy structural vector autoregressive (SVAR) models for the three economies with different monetary regimes and varying degrees of openness.In both Japan and Hong Kong, shocks to the nominal effective exchange rate have a statistically significant impact on prices, with a notably stronger effect in Hong Kong.Our results provide evidence about the role of external influences in the deflation episodes of these economies, and could also be seen to weakly support suggestions to depreciate the currency in order to escape from a liquidity trap.The importance of the interest rate channel is also found to be high in Japan and Hong Kong.In China, where interest rates have not been an important monetary policy tool, neither exchange nor interest rate shocks significantly influence price developments. Keywords: Deflation, Zero lower bound, SVAR JEL Classification: E31, F41
Rights: https://helda.helsinki.fi/bof/copyright


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