International Inflation Spillovers Through Input Linkages

50 Pages Posted: 14 Apr 2017

See all articles by Raphael Auer

Raphael Auer

Bank for International Settlements (BIS)

Andrei A. Levchenko

University of Michigan - Department of Economics; National Bureau of Economic Research (NBER); Centre for Economic Policy Research (CEPR)

Philipp Saure

Swiss National Bank

Multiple version iconThere are 4 versions of this paper

Date Written: March 14, 2017

Abstract

We document that observed international input-output linkages contribute substantially to synchronizing producer price inflation (PPI) across countries. Using a multi-country, industry-level dataset that combines information on PPI and exchange rates with international and domestic input-output linkages, we recover the underlying cost shocks that are propagated internationally via the global input-output network, thus generating the observed dynamics of PPI. We then compare the extent to which common global factors account for the variation in actual PPI and in the underlying cost shocks. Our main finding is that across a range of econometric tests, input-output linkages account for half of the global component of PPI inflation.

We report three additional findings:

(i) the results are similar when allowing for imperfect cost pass-through and demand complementarities;

(ii) PPI synchronization across countries is driven primarily by common sectoral shocks and input-output linkages amplify co-movement primarily by propagating sectoral shocks; and

(iii) the observed pattern of international input use preserves fat-tailed idiosyncratic shocks and thus leads to a fat-tailed distribution of inflation rates, i.e., periods of disination and high inflation.

Keywords: international inflation synchronization, globalization, inflation, input linkages, monetary policy, global value chain, production structure, input-output linkages, supply chain

JEL Classification: E310, E520, E580, F020, F140, F330, F410, F420, F620

Suggested Citation

Auer, Raphael and Levchenko, Andrei A. and Saure, Philipp, International Inflation Spillovers Through Input Linkages (March 14, 2017). CESifo Working Paper Series No. 6395, Available at SSRN: https://ssrn.com/abstract=2952281

Raphael Auer (Contact Author)

Bank for International Settlements (BIS) ( email )

Andrei A. Levchenko

University of Michigan - Department of Economics ( email )

611 Tappan Street
Ann Arbor, MI 48109-1220
United States

HOME PAGE: http://alevchenko.com

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

Philipp Saure

Swiss National Bank ( email )

Research
Fraumuensterstr. 8
Zuerich, 8022
Switzerland

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