Does World Import Growth Amplify Domestic Inflation Responses to Inflationary Shocks?
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In light of the decline in global trade, import prices, oil prices and other commodity prices, this chapter revisits the role of positive global import growth shocks and how they amplify domestic inflationary shocks. Evidence shows that positive global import growth shocks propagate domestic inflation responses. The counterfactual scenarios show that the simultaneous occurrence of exchange rate, oil price, other commodity price and break-even inflation expectation shocks propagates the impact of positive global imports growth shock on domestic inflation.
Furthermore, the counterfactual scenarios show that, indeed, the subdued state of the global economic growth has resulted in muted inflationary pressures. External shocks emanating from advanced, emerging market and developing economies have played a meaningful role in keeping domestic inflation within the target band. In addition, evidence indicates that the current state of the global economy does have an impact on the speed at which the repo rate responds to domestic inflationary pressures. The pursuit of the mandate of price stability is not constrained by global import growth but the pace of repo rate adjustment differs depending on whether these are considered or not.