Discussion of “Tailwinds and Headwinds: How Does Growth in the BRICs Affect Inflation in the G-7?”

It is well known that in all G-7 countries inflation has been low and rather stable for almost twenty years. During this period, we have seen the emergence of the BRIC countries (Brazil, Russia, India, and China)—especially China—as a producer of low-cost manufacturing goods. Many economic commentators have suggested a causal link between the two. In particular, it is conjectured that the resulting low cost of manufacturing imports has likely contributed to the good inflation outcomes observed in industrial countries. The object of this paper is to examine such claim. However, the authors recognize up front that the case is complicated by the fact that growth in the BRIC countries has not only been associated with producing low-cost manufacturing goods, but it has also simultaneously increased the demand for oil and other commodities. Since such demand tends to push up the price of oil, it follows that the effect on inflation of the growth of BRIC countries can have either been a desirable effect—referred to as a tailwind effect that helps keep inflation down—or an undesirable effect—referred to as a headwind effect which tends to push up inflation. The authors’ goal is to quantify these two offsetting forces so as to evaluate their net effect on inflation in G-7 countries. The authors pursue the questions using a calibrated stochastic dynamic general equilibrium model. They view the underlying cause of growth in the BRIC countries as resulting from exogenous productivity increases. Since productivity growth has been high for many years in these countries, it appears reasonable to take it as the main driving force. The model explored in the paper is in the New Keynesian (NK) tradition. It has three blocs: a first bloc meant to capture the