The Global Dimension of Inflation - Evidence from Factor-Augmented Phillips Curves

Abstract

We examine the global dimension of inflation in 24 OECD countries between 1980 and 2007 in a traditional Phillips curve framework. We decompose output gaps and changes in unit labor costs into global and national components using a factor analysis and introduce these components separately in the regression. Our most important finding is that global components of changes in unit labor costs have a notable impact on inflation. Import price inflation plays a smaller role, and it is unclear how global components of output gaps affect inflation. We conclude that central banks should monitor worldwide conditions when assessing inflation.

Keywords: inflation, globalization, Phillips curves, factor models, monetary policy rules

JEL Classification: E31, F41, C33, C50