Working Paper: CEPR ID: DP13470
Authors: Massimiliano Marcellino; Andrea Carriero; Francesco Corsello
Abstract: Global developments play an important role for domestic inflation rates. Earlier literature has found that a substantial amount of the variation in a large set of national inflation rates can be explained by a single global factor. However, inflation volatility has been typically neglected, while it is clearly relevant both from a policy point of view and for structural analysis and forecasting. We study the evolution of inflation rates in several countries, using a novel model that allows for commonality in both levels and volatilities, in addition to country-specific components. We find that inflation volatility is indeed important, and a substantial fraction of it can be attributed to a global factor that is also driving inflation levels and their persistence. While various phenomena may contribute to global inflation dynamics, it turns out that since the early '90s level and volatility of the estimated global factor are correlated with the Chinese PPI and Oil inflation. The extent of commonalityamong core inflation rates and volatilities is substantially smaller than for overall inflation, which leaves scope for national monetary policies. Finally, we show that the point and density forecasting performance of the model is good relative to standard benchmarks, which provides additional evidence on its reliability.
Keywords: inflation volatility; global factors; large datasets; multivariate autoregressive index models; reduced rank regressions; forecasting
JEL Codes: E31; F62; C32; E37; C53
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Global factor (F29) | Inflation volatility (E31) |
| Global factor (F29) | Inflation levels (E31) |
| Global factor (F29) | Persistence of inflation (E31) |
| Chinese PPI (E31) | Global factor (F29) |
| Oil inflation (L71) | Global factor (F29) |
| Common component of inflation rates (E31) | National inflation rates variability (E31) |
| Global inflation factor (E31) | National inflation rates (E31) |
| Persistence of global inflation factor (E31) | Common components of inflation (E31) |