The effect of a Chinese slowdown on inflation in the euro area and the United States

We investigate the effect of a Chinese slowdown on inflation in the euro area and the United States using the NiGEM multi-country model. We construct different scenarios including a fall in Chinese aggregate demand, a commodity price slump, financial market corrections and a devaluation of the renmimbi. While the commodity slump has the strongest impact on inflation, the demand and exchange rate shocks also play a role; on the contrary, financial turbulences have minor effects. Finally, we study the extent to which monetary policy in advanced economies can succeed in reflating the economy following such a Chinese slowdown. The room for central bank interventions is large.