The Role of Global Inflation in Estimation of US Output Components in the post Bretton Woods Era: Evidence from Multivariate Unobserved Components Models

Arabinda Basistha ()

No 26-04, Working Papers from Department of Economics, West Virginia University

Abstract: We study the role of global inflation in estimation of US output components using multivariate unobserved components models. We augment the US inflation equations with global inflation based on strong empirical evidence in past studies. We further allow past global and domestic inflation to influence the output dynamics as a separate output component, beyond the output trend and output gap. The estimation results from the state-space model show a negative association of past inflation with this output component. The role of global inflation is informative in the negative association with the inflation based output component. The long-term fall in inflation is associated with an average 2.9 percent rise in GDP in the late 2010s relative to the early 1970s. The estimates also reveal a stronger positive association of global inflation with US inflation after allowing for the inflation based output component. Moreover, the results show that the output gap estimates can be affected in the absence of the inflation based output component. The results are robust to multiple specifications and extensions. Additional decomposition suggests that global inflation negatively influences the productivity component; not the hours component. We further develop a dynamic factor augmented unobserved components model that allows for three factors of inflation. The results show that a common factor of global inflation and domestic inflation as the primary contributor of the negative association of inflation on the output component. The analysis highlights the informational value of global inflation for US monetary policy for both inflation and output.

Keywords: Global inflation; output; unobserved components; Phillips curve; dynamic factor. (search for similar items in EconPapers)
JEL-codes: C32 E31 E32 F42 (search for similar items in EconPapers)
Pages: 60 pages
Date: 2026-02
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