Chinese Influences on Inflation Determination in Australia and the ASEAN group: A Markov-Switching Analysis

Abstract

Notwithstanding China’s rapidly growing role in the world economy, there is surprisingly little analysis of the extent to which inflation dynamics in China are passed through to other regional economies. We find evidence of significant inflation transmission from China to Australia and the five larger ASEAN economies under our Markov-switching analysis that allows for variation across high and low volatility states. Chinese inflation effects are further confirmed when we incorporate money supply and commodity price effects with a Markov-Switching Vector Autoregressive (VAR) framework.