Inflation co-movement in emerging and developing Asia: the monsoon effect

ABSTRACT

Co-movement (synchronicity) in food-inflation rates among emerging and developing countries in Asia is partly due to common rainfall shocks – a result which the paper terms the ‘monsoon effect’. Economies with higher trade integration and co-movement in nominal effective exchange rates also experience greater food-inflation co-movement. In the context of the growing literature on the globalization of inflation, these results suggest that common weather patterns are partly responsible for any role played by a so-called ‘global factor’ among inflation rates in emerging and developing economies, in Asia at least.

KEYWORDS:

• Inflation
• spillovers
• co-movement
• weather

JEL CLASSIFICATION:

• E31
• F40
• F15
• F60

Acknowledgments

I thank Nimarjit Singh for excellent research support, Ruchir Agarwal, Gerard Almekinders, Andreas Bauer, Marco Casiraghi, Chetan Ghate, Adil Mohommad, Ranil Salgado, Rajeswari Sengupta, participants at the ‘7th Delhi Macroeconomics workshop’, participants at the workshop on ‘Modernization of monetary policy in India, Nepal, and Bhutan’, and an anonymous reviewer for insightful comments and discussions.

Disclosure statement

The views expressed in this paper are those of the author and do not necessarily represent the views of the IMF, its Executive Board, or IMF management.

Correction Statement

This article has been republished with minor changes. These changes do not impact the academic content of the article.

Notes

¹ There is ample evidence in the literature that weather patterns play a key role in determining inflation – see Brown and Kshirsagar (2015), and Cashin, Mohaddes, and Raissi (2017). In addition, as discussed in Baffes, Kshirsagar, and Mitchell (2019), the role played by natural rainfall patterns would likely be more pronounced in countries (or, among components of the food basket) where the use of modern inputs is more limited (and, the share of land under irrigation is lower).

² See also work by Mumtaz and Surico (2012), Neely and Rapach (2011), Auer, Levchenko, and Sauré (2017), and Altansukh et al. (2017).

³ Countries included in the analysis are: Bangladesh, Bhutan, Cambodia, China, India, Indonesia, Malaysia, Mongolia, Nepal, Pakistan, Philippines, Thailand and Vietnam. Data sources are shown in Appendix Table A1.

⁴ The main empirical results are broadly robust to the use of alternative inflation-rate calculations.

⁵ For each country, these data are plotted in the appendix (Figures A1 and A2).

⁶ Since monthly data are used in the analysis, the smoothing parameter for the filter is set to be 130,000 (see Ravn and Uhlig 2002).

⁷ The notion of trade integration used is simply the sum of each country-pair member (i’s) imports from the other country-pair member (j) as a share of each country’s total imports: .

⁸ Hausman testing indicates no systematic difference in coefficient estimates under a random-effects as compared to a country-pair fixed-effects specification.

⁹ Additional specifications using co-movement in deposit rates in place of money supply growth yield very similar results.