Trade and inflation in production networks: The case of Australia
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PhD Seminar (Econ)
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The world experienced a sustained period of low and stable inflation from the early 1990s until COVID-19. This paper examines the impacts of international trade on price inflation through production networks. We first build a theoretical model of an open economy to illustrate how input-output networks propagate the price impacts of trade shocks. Using Australia’s data from 47 manufacturing industries from 2000 to 2023, we show strong connectedness of inflation across industries and further estimate the network impacts of trade shocks on inflation. The results show that the network impacts of trade shocks are as significant as their direct impacts, and are primarily driven by upstream industries. Australia’s low inflation before COVID-19 benefited from increasing exposure to China’s low-cost exports, while post-COVID inflation surged with global supply chain disruptions. This paper underscores the importance of economic globalisation for inflation through production networks, and offers several implications for monetary policy.
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Venue: Weston Theatre, JG Crawford Building, 132 Lennox Crossing, Acton 2601 ACT (ANU Crawford School of Public Policy)
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