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
Date Written: June 13, 2011
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
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