Have the driving forces of inflation changed in advanced and emerging market economies?

Gunes Kamber, Madhusudan Mohanty and James Morley

No 896, BIS Working Papers from Bank for International Settlements

Abstract: We construct a balanced panel dataset for 47 advanced and emerging market economies over a sample period from 1996 to 2018 to empirically investigate possible changes in the driving forces of inflation. Using an open economy hybrid Phillips curve model of inflation and formally testing for structural breaks, we find relatively little significant change in the underlying driving forces or their quantitative effects for most economies, even after the Great Financial Crisis. However, one notable change has been an increase in the average weight on expected future inflation, measured using professional forecasts, for both advanced and emerging market economies. We find very heterogeneous but significant effects of inflation expectations, domestic and foreign output gaps, exchange rate passthrough, and oil prices, with generally higher sensitivities to external driving forces for emerging market economies. Consistent with the model, the behavior of the various inflation drivers, especially what appear to be better anchored inflation expectations, can explain patterns of changes in the level and volatility of inflation across different economies.

Keywords: open economy Phillips curve; structural breaks; inflation expectations; exchange rate passthrough; inflation volatility (search for similar items in EconPapers)
JEL-codes: E31 F31 F41 (search for similar items in EconPapers)
Pages: 33 pages
Date: 2020-10
New Economics Papers: this item is included in nep-cba, nep-mac, nep-mon and nep-opm
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

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