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What Drives Inflation and How: Evidence from Additive Mixed Models Selected by cAIC

Philipp F. M. Baumann, Enzo Rossi () and Alexander Volkmann

Papers from arXiv.org

Abstract: We analyze the forces that explain inflation using a panel of 122 countries from 1997 to 2015 with 37 explanatory variables. 98 models motivated by economic theory are compared to a gradient boosting algorithm, and non-linearities between the explanatory variables and inflation are explicitly considered. The boosting algorithm outperforms theory-based models. We confirm that energy prices are important but what really matters for inflation is a non-linear interplay between energy prices and energy rents. Demographic developments also make a difference. Globalization and technology, public debt, central bank independence and political characteristics are less relevant. GDP per capita is more relevant than the output gap, credit growth more than M2 growth. We detect several structural breaks since the global financial crisis.

Date: 2020-06, Revised 2022-02
New Economics Papers: this item is included in nep-ene, nep-mac and nep-mon
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Working Paper: What drives inflation and how? Evidence from additive mixed models selected by cAIC (2021) Downloads
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