ACDE PhD seminar: Trade and inflation in production networks: The case of Australia

Thuy Hang Duong, PhD candidate in Economics at the Arndt-Corden Department of Economics, presents her research about the impacts of international trade on inflation through production networks.

The world experienced a sustained period of low and stable inflation from the early 1990s until COVID-19. This paper examines the impacts of international trade on price inflation through production networks. We first build a theoretical model of an  open economy to illustrate how input-output networks propagate the price impacts of trade shocks. Using Australia's data from 47 manufacturing industries from 2000 to 2023, we show strong connectedness of inflation across industries and further estimate the network impacts of trade shocks on inflation. The results show that the network impacts of trade shocks are as significant as their direct impacts, and are primarily driven by upstream industries. Australia's  low inflation before COVID-19 benefited from increasing exposure to China's low-cost exports, while post-COVID inflation surged with global supply chain disruptions. This paper underscores the importance of economic globalisation for inflation through production networks, and offers several implications for monetary policy.