BIS Papers No 77 Globalisation, inflation and monetary policy in Asia and the Pacific Proceedings from the People’s Bank of China-BIS Research Conference on “Globalisation and inflation dynamics in Asia and the Pacific” Monetary and Economic Department March 2014 The views expressed are those of the authors and not necessarily the views of the BIS. This publication is available on the BIS website (www.bis.org). © Bank for International Settlements 2014. All rights reserved. Brief excerpts may be reproduced or translated provided the source is stated. ISSN 1609-0381 (print) ISBN 978-92-9197-986-8 (print) ISSN 1682-7651 (online) ISBN 978-92-9197-985-1 (online) Foreword Frank Packer and Aaron Mehrotra The People’s Bank of China and the Bank for International Settlements co-hosted a research conference on “Globalisation and Inflation Dynamics in Asia and the Pacific” on 23–24 September 2013 in Beijing. This was the wrap-up conference for the BIS Asian Office’s two-year research programme on globalisation and inflation that was launched by the Asian Consultative Council in February 2012. The event brought together senior officials and researchers from central banks, international organisations and academia. The research papers presented at the conference covered the dynamics of inflation forecasts in the region; the measurement of economic slack; supply chains and inflation spillovers; financial globalisation and the role of exchange rate in monetary policy; global commodity price cycles and their monetary policy implications; and the role of inflation in China’s monetary policy rule. Governor Zhou Xiaochuan of the People’s Bank of China made the opening remarks and former Governor Masaaki Shirakawa of the Bank of Japan delivered the keynote address. The conference also included a policy panel discussion by Deputy Governors focusing on the challenges posed by globalisation to the Asia-Pacific region. The panel was chaired by Deputy Governor Yi Gang of the People’s Bank of China. There was general agreement among the participants that the nature of real globalisation was changing. In economies that are integrated into international supply chains, cost shocks may result in significant cross-border spillovers. At the same time, increased financial globalisation could present a challenge to exchange rate management in the region’s economies. The participants also broadly recognised that financial globalisation was creating significant monetary policy spillovers across borders. This volume is a collection of the speeches, presentations and a background paper from the conference. BIS Papers No 77 iii Contents Foreword ................................................................................................................................................. iii List of participants .............................................................................................................................. vii Programme ............................................................................................................................................ xi Opening remarks Zhou Xiaochuan .................................................................................................................................... 1 Session I Inflation forecasts in Asia and the Pacific: performance, disagreement and spillovers Pierre L Siklos ......................................................................................................................................... 5 Comments on Pierre Siklos’ paper Richard Dennis ................................................................................................................................... 31 Measuring economic slack in Asia and the Pacific James Morley ...................................................................................................................................... 35 Comments on James Morley’s paper Jun Il Kim .............................................................................................................................................. 51 Keynote address Is inflation (or deflation) “always and everywhere” a monetary phenomenon? My intellectual journey in central banking Masaaki Shirakawa ............................................................................................................................ 57 Session II Real globalisation and price spillovers in Asia and the Pacific Raphael A Auer and Aaron Mehrotra ........................................................................................ 81 Comments on Raphael Auer and Aaron Mehrotra’s paper Toshitaka Sekine ................................................................................................................................ 91 Responding to exchange rates in a globalised world Michael B Devereux and James Yetman .................................................................................. 97 Comments on Michael Devereux and James Yetman’s paper Ippei Fujiwara .................................................................................................................................... 119 Session III Has Asian emerging market monetary policy been too procyclical when responding to swings in commodity prices? Andrew Filardo and Marco Lombardi ..................................................................................... 129 Comments on Andrew Filardo and Marco Lombardi’s paper Luis A V Catão ................................................................................................................................... 155 BIS Papers No 77 v Inflation and China’s monetary policy reaction function: 2002–2013 Eric Girardin, Sandrine Lunven and Guonan Ma ................................................................. 159 Comments on Eric Girardin, Sandrine Lunven and Guonan Ma’s paper Dong He .............................................................................................................................................. 171 Closing remarks Stephen G Cecchetti ...................................................................................................................... 175 Background paper How anchored are inflation expectations in Asia? Evidence from surveys of professional forecasters Aaron Mehrotra and James Yetman ........................................................................................ 181 vi BIS Papers No 77 List of participants Central banks Reserve Bank of Australia Philip Lowe Deputy Governor People’s Bank of China Zhou Xiaochuan Governor Yi Gang Deputy Governor He Jianxiong Director General of International Department Jin Zhongxia Director General of Research Institute Zhu Jun Deputy Director General of International Department Yao Yudong Deputy Director General of Monetary Policy Department Guo Jianwei Deputy Director General of Monetary Policy Department II Wang Yi Deputy Director General of Statistics and Analysis Department Hong Kong Monetary Authority Dong He Executive Director, Research Department Charles Xiangrong Yu Manager/Economist Bank Indonesia Perry Warjiyo Deputy Governor Aida S Budiman Director of International Department Bank of Japan Toshitaka Sekine Deputy Director-General BIS Papers No 77 vii Bank of Korea Jun Il Kim Deputy Governor and Chief Economist Central Bank of Malaysia Marzunisham Omar Assistant Governor Reserve Bank of New Zealand Dean Ford Manager, Forecasting Bangko Sentral ng Pilipinas Veronica Batallones Bayangos Deputy Director Swiss National Bank Raphael Auer Deputy Head, International Trade and Capital Flows Bank of Thailand Pornpen Sodsrichai Division Executive Keynote speaker Former Governor, Bank of Japan Masaaki Shirakawa Academic and policy institutions University of New South Wales James Morley Professor Australia National University Ippei Fujiwara Associate Professor University of British Columbia Michael Devereux Professor Wilfrid Laurier University Pierre Siklos Professor Aix-Marseille University Eric Girardin Professor University of Glasgow Richard Dennis Professor International Monetary Fund Luis Catao Senior Economist viii BIS Papers No 77 Bank for International Settlements Stephen Cecchetti Economic Adviser Andrew Filardo Head of Monetary Policy BIS Representative Office for Asia and Frank Packer the Pacific Head of Economics and Financial Markets for Asia and the Pacific James Yetman Senior Economist Guonan Ma Senior Economist Aaron Mehrotra Senior Economist BIS Papers No 77 ix Programme Monday 23 September 2013 08:30 – 09:00 Welcome coffee 09:00 – 09:20 Opening address Speaker: Zhou Xiaochuan (People’s Bank of China) Session One Chair: Philip Lowe (Reserve Bank of Australia) 09:20 – 10:35 Inflation forecasts in Asia and the Pacific: performance, disagreement and spillovers Author: Pierre Siklos (Wilfrid Laurier University) Discussant: Richard Dennis (University of Glasgow) 10:35 – 11:00 Coffee break 11:00 – 12:15 Measuring economic slack in Asia and the Pacific Author: James Morley (University of New South Wales) Discussant: Jun Il Kim (Bank of Korea) 12:15 – 13:45 Lunch Keynote address Chair: Stephen Cecchetti (Bank for International Settlements) 13:45 – 14:45 Is inflation (or deflation) “always and everywhere” a monetary phenomenon? My intellectual journey in central banking Speaker: Masaaki Shirakawa (former Governor, Bank of Japan) Session Two Chair: Perry Warjiyo (Bank Indonesia) 14:45 – 16:00 Trade linkages and the globalisation of inflation in Asia and the Pacific Authors: Raphael Auer (Swiss National Bank) Aaron Mehrotra (Bank for