International Comovements in Inflation Rates and Country Characteristics

Federal Reserve Bank of St. Louis Working Paper No. 2008-025F

38 Pages Posted: 3 Aug 2008 Last revised: 17 Jun 2011

See all articles by Christopher J. Neely

Christopher J. Neely

Federal Reserve Bank of St. Louis - Research Division

David Rapach

Saint Louis University; Washington University in St. Louis

Date Written: June 13, 2011

Abstract

Common shocks, similarities in central bank reaction functions, and international trade potentially produce common components in international inflation rates. This paper characterizes such links in international inflation rates with a dynamic latent factor model that decomposes 64 national inflation rates into world, regional, and idiosyncratic components. The world and regional components account for 35% and 16%, respectively, of annual inflation variability on average across countries, so that international influences together explain just over half of inflation variability. The importance of the world and regional components, however, differs substantially across countries. Economic policy choices and development measures strongly explain the cross-sectional variation in the relative importance of international influences. A subsample analysis reveals that the regional (world) factor increases in importance for a number of North American and European (Latin American and Asian) countries since 1980.

Keywords: Inflation, Dynamic latent factor model, Bayesian estimation

JEL Classification: C32, E31, E52, F42

Suggested Citation

Neely, Christopher J. and Rapach, David, International Comovements in Inflation Rates and Country Characteristics (June 13, 2011). Federal Reserve Bank of St. Louis Working Paper No. 2008-025F. Available at SSRN: https://ssrn.com/abstract=1195706 or http://dx.doi.org/10.2139/ssrn.1195706

Christopher J. Neely (Contact Author)

Federal Reserve Bank of St. Louis - Research Division ( email )

411 Locust St
Saint Louis, MO 63011
United States
314-444-8568 (Phone)
314-444-8731 (Fax)

HOME PAGE: http://www.stls.frb.org/research/econ/cneely/

David Rapach

Saint Louis University ( email )

3674 Lindell Blvd
St. Louis, MO 63108-3397
United States

HOME PAGE: http://https://sites.google.com/slu.edu/daverapach

Washington University in St. Louis

One Brookings Drive
Campus Box 1133
St. Louis, MO 63130-4899
United States

HOME PAGE: http://https://sites.google.com/slu.edu/daverapach

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