By employing the factor augmented vector autoregression (FAVAR) model, this paper compares the role of macroeconomic and sector-specific factors in price movements for China and India, taking into account the features unique to developing economies. We find that fluctuations in the aggregated prices in China are more persistent than the underlying disaggregated prices. Compared to China, prices in India respond more promptly to macroeconomic and monetary policy shocks. We also show that the urban CPI in China responds more sharply than rural CPI when facing sector-specific shocks, while the opposite is valid for India.
Unintended Consequences of U. S. Monetary Policy Shocks: Dutch Disease and Capital Flow Measures in Emerging Markets and Developing Economies
