Risky Inflation: A Cross Country Analysis

Jongrim Ha, Haroon Mumtaz and Franz Ruch

CAMA Working Papers from Centre for Applied Macroeconomic Analysis, Crawford School of Public Policy, The Australian National University

Abstract: We develop a new dynamic factor model with stochastic volatility to quantify inflation tail risk across a large cross section of countries. The framework accommodates unbalanced panels and mixed-frequency data, allowing estimation of the full predictive distribution of inflation for over 200 economies over 1971-2023. Inflation risk - defined as the probability that inflation exceeds 5 percent over a twelve-month horizon - declined during the Great Moderation but rose sharply following the COVID-19 pandemic, with the global probability surpassing 50 percent from early 2021 through 2023. Exploiting the joint predictive distribution of inflation and real activity, we document a brief surge in global stagflation risk in late 2021. While inflation risk responds to both structural demand and supply shocks, it tends to decline during monetary policy tightening cycles. Cross-country evidence further shows that economies with greater trade and financial openness, stronger monetary policy frameworks, and fixed exchange rate regimes face systematically lower inflation risk, while commodity-exporting countries exhibit higher tail exposures. Overall, the results under-score the importance of monitoring inflation risks alongside inflation forecasts and highlight the role of institutions in mitigating macroeconomic tail vulnerabilities.

Keywords: monetary policy; risk; FAVAR; stochastic volatility (search for similar items in EconPapers)
JEL-codes: C32 E44 E52 (search for similar items in EconPapers)
Pages: 52 pages
Date: 2026-08
New Economics Papers: this item is included in nep-cba and nep-mon
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Persistent link: https://EconPapers.repec.org/RePEc:een:camaaa:2026-72

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