The Global Component of Inflation Volatility

Massimiliano Marcellino, Andrea Carriero and Francesco Corsello ()

No 13470, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: 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: inflation; Volatility; Global factors; Large datasets; Multivariate autoregressive index models; Reduced rank regressions; Forecasting (search for similar items in EconPapers)
JEL-codes: C32 C53 E31 E37 F62 (search for similar items in EconPapers)
Date: 2019-01
New Economics Papers: this item is included in nep-ets, nep-mac and nep-mon
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (3)

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Related works:
Journal Article: The global component of inflation volatility (2022)
Working Paper: The global component of inflation volatility (2018)
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