All Together Now: Do International Factors Explain Relative Price Comovements?

35 Pages Posted: 13 Mar 2010

See all articles by Özer Karagedikli

Özer Karagedikli

Reserve Bank of New Zealand

Haroon Mumtaz

University of London - School of Sciences

Misa Tanaka

Bank of England

Date Written: March 10, 2010

Abstract

Recent research has found evidence of increasing comovement in CPI inflation rates across industrialised countries. This paper considers whether this can be attributed to greater global integration of product markets. To examine this question, we build a data set of 28 matched product category price indices for fourteen advanced economies for 1998 Q1 to 2008 Q2, and decompose the inflation rates into a world factor, country-specific factors, and category-specific factors using a Bayesian dynamic factor model with Gibbs sampling. We find that the category-specific factors account for a large part of the comovement in the prices of goods which are intensive in internationally traded primary commodities; but this is less evident for other traded goods. We also find that both the world factor and the category-specific factors become more significant in explaining the movement in the relative prices in the second half of our sample.

Keywords: Disaggregated international price, dynamic factor model, Gibbs sampling

JEL Classification: E30, E52

Suggested Citation

Karagedikli, Ozer and Mumtaz, Haroon and Tanaka, Misa, All Together Now: Do International Factors Explain Relative Price Comovements? (March 10, 2010). Bank of England Working Paper No. 381. Available at SSRN: https://ssrn.com/abstract=1568772 or http://dx.doi.org/10.2139/ssrn.1568772

Ozer Karagedikli

Reserve Bank of New Zealand ( email )

2 The Terrace
P.O. Box 2498
Wellington, 6011
New Zealand
64 4-471-3792 (Phone)
64 4-473-1209 (Fax)

Haroon Mumtaz (Contact Author)

University of London - School of Sciences ( email )

London, WC1E 7HX
United Kingdom

Misa Tanaka

Bank of England ( email )

Threadneedle Street
London, EC2R 8AH
United Kingdom

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