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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

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Abstract: We analyze the forces that explain inflation using a panel of 122 countries from 1997 to 2015 with 37 regressors. 98 models motivated by economic theory are compared to a gradient boosting algorithm, non-linearities and structural breaks are considered. We show that the typical estimation methods are likely to lead to fallacious policy conclusions which motivates the use of a new approach that we propose in this paper. The boosting algorithm outperforms theory-based models. We confirm that energy prices are important but what really matters for inflation is their non-linear interplay with 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.

Date: 2020-06, Revised 2022-08
New Economics Papers: this item is included in nep-ene, nep-mac and nep-mon
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