Co-movement in Inflation

Hugo Gerard
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Hugo Gerard: Reserve Bank of Australia

RBA Research Discussion Papers from Reserve Bank of Australia

Abstract: Inflation rates across countries tend to exhibit a degree of co-movement. In this paper we use a panel vector autoregression (panel VAR) model to investigate possible explanations of this co-movement for the G7 economies. Shocks to commodity prices are found to be more important than common movements in real activity as a driver of 'global inflation' dynamics. However, commodity prices and common real activity cannot explain all of the co-movement in inflation. Even when controlling for these factors, a common indicator of inflation still offers explanatory power for domestic inflation in the panel VAR. Given the role of global inflation in explaining inflation in the G7 countries, we then consider the significance of global inflation for Australian inflation. We find that movements in international inflation offer useful information when included in models of Australian inflation, particularly headline inflation.

Keywords: global inflation; panel VAR; factor models; Bayesian estimation (search for similar items in EconPapers)
JEL-codes: C33 E31 E32 F44 (search for similar items in EconPapers)
Date: 2012-03
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Citations: View citations in EconPapers (4)

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Persistent link: https://EconPapers.repec.org/RePEc:rba:rbardp:rdp2012-01

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