Inflation Spillovers through International Trade
44 Pages Posted: 4 Dec 2023
Date Written: November 1, 2023
Abstract
This paper investigates the role of international trade in explaining inflation spillovers across 146 countries for the sample period of 1970-2022. International inflation spillovers are estimated at the country-pair level by using the local projections method, where alternative measures of headline inflation, food inflation, energy inflation, and producer inflation are employed. Inflation spillovers are statistically significant for 54% of country pairs for headline inflation, 58% of country pairs for food inflation, 77% of country pairs for energy inflation, and 88% of country pairs for producer inflation. Regarding the magnitudes, a unit shock of inflation in a spillover source country results in 0.26% of an inflation in the spillover destination country for headline and food inflation, 0.45% for energy inflation, and 0.53% for producer inflation. These results are shown to be highly different across country groups, which requires further investigation. Accordingly, the existence of inflation spillovers across country pairs is further connected to the standard gravity variables in international trade for all inflation measures, whereas the magnitude of inflation spillovers is explained by the same variables mainly for producer inflation, consistent with the channel of international input-output linkages. Important policy implications follow.
Keywords: Inflation Spillovers, Country Pairs, Gravity Variables, International Trade
JEL Classification: E31, F02, F41, F44, F62
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