The Global Component of Inflation Volatility

71 Pages Posted: 28 Jan 2019

See all articles by Andrea Carriero

Andrea Carriero

Queen Mary, University of London

Francesco Corsello

Bank of Italy

Massimiliano Giuseppe Marcellino

Bocconi University - Department of Economics; Centre for Economic Policy Research (CEPR)

Multiple version iconThere are 2 versions of this paper

Date Written: January 2019


Global developments play an important role for domestic inflation rates. Earlier literature has found that a substantial amount of the variation in a large set of national inflation rates can be explained by a single global factor. However, inflation volatility has been typically neglected, while it is clearly relevant both from a policy point of view and for structural analysis and forecasting. We study the evolution of inflation rates in several countries, using a novel model that allows for commonality in both levels and volatilities, in addition to country-specific components. We find that inflation volatility is indeed important, and a substantial fraction of it can be attributed to a global factor that is also driving inflation levels and their persistence. While various phenomena may contribute to global inflation dynamics, it turns out that since the early '90s level and volatility of the estimated global factor are correlated with the Chinese PPI and Oil inflation. The extent of commonality among core inflation rates and volatilities is substantially smaller than for overall inflation, which leaves scope for national monetary policies. Finally, we show that the point and density forecasting performance of the model is good relative to standard benchmarks, which provides additional evidence on its reliability.

Keywords: Forecasting, Global factors, inflation, large datasets, Multivariate Autoregressive Index models, Reduced Rank Regressions, volatility

JEL Classification: C32, C53, E31, E37, F62

Suggested Citation

Carriero, Andrea and Corsello, Francesco and Marcellino, Massimiliano, The Global Component of Inflation Volatility (January 2019). CEPR Discussion Paper No. DP13470, Available at SSRN:

Andrea Carriero (Contact Author)

Queen Mary, University of London ( email )

Mile End Road
London, London E1 4NS
United Kingdom

Francesco Corsello

Bank of Italy ( email )

Via Nazionale 91
Rome, 00184

Massimiliano Marcellino

Bocconi University - Department of Economics ( email )

Via Gobbi 5
Milan, 20136

Centre for Economic Policy Research (CEPR) ( email )

United Kingdom

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