Working Paper: CEPR ID: DP14195
Authors: Kristin Forbes
Abstract: Inflation dynamics have been difficult to explain over the last decade. This paper explores if a more comprehensive treatment of globalization can help. CPI inflation has become more synchronized around the world since the 2008 crisis, but core and wage inflation have become less synchronized. Global factors (including commodity prices, world slack, exchange rates, and global value chains) are significant drivers of CPI inflation in a cross-section of countries, and their role has increased over the last decade, particularly the role of non-fuel commodity prices. These global factors, however, do less to improve our understanding of core and wage inflation. Key results are robust to using a less-structured trend-cycle decomposition instead of a Phillips curve framework, with the set of global variables more important for understanding the cyclical component of inflation over the last decade, but not the underlying slow-moving inflation trend. Domestic slack still plays a role for all the inflation measures, although globalization has caused some “flattening” of this relationship, especially for CPI inflation. Although CPI inflation is increasingly “determined abroad”, core and wage inflation is still largely a domestic process.
Keywords: inflation; Phillips curve; trend-cycle; price dynamics; globalization; commodity prices
JEL Codes: E31; E37; E52; E58; F62
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| global factors (F69) | CPI inflation (E31) |
| commodity prices (Q02) | CPI inflation (E31) |
| world slack (Y70) | CPI inflation (E31) |
| exchange rates (F31) | CPI inflation (E31) |
| global value chains (F60) | CPI inflation (E31) |
| globalization (F60) | flattening of the Phillips curve (E31) |
| domestic slack (D13) | CPI inflation (E31) |
| globalization (F60) | core and wage inflation (J31) |
| domestic slack (D13) | core and wage inflation (J31) |
| CPI inflation (E31) | prediction errors reduction (C52) |