BOFIT Discussion Papers, Institute for Economies in Transition, Bank of Finland
No 17/2005:
Exchange and interest rate channels during a deflationary era - Evidence from Japan, Hong Kong and China
Aaron Mehrotra ()
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; (follow links to similar papers)
JEL-Codes: E31; F41; (follow links to similar papers)
58 pages, December 30, 2005
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