Working Paper: CEPR ID: DP6767
Authors: Haroon Mumtaz; Paolo Surico
Abstract: Several industrialised countries have had a similar inflation experience in the past 30 years, with inflation high and volatile in the 1970s and the 1980s but low and stable in the most recent period. We explore the dynamics of inflation in these countries via a time-varying factor model. This statistical model is used to describe movements in inflation that are idiosyncratic or country specific and those that are common across countries. In addition, we investigate how comovement has varied across the sample period.Our results indicate that there has been a decline in the level, persistence and volatility of inflation across our sample of industrialised countries. In addition, there has been a change in the degree of comovement, with the level and persistence of national inflation rates moving more closely together since the mid-1980s.
Keywords: factor model; low inflation; monetary policy; time variation
JEL Codes: E30; E52
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| improvements in monetary policy (E52) | decline in the level of inflation (E31) |
| fiscal policy enhancements (E62) | decline in the level of inflation (E31) |
| increased productivity (O49) | decline in the level of inflation (E31) |
| globalization effects (F69) | decline in the level of inflation (E31) |
| decline in the level of inflation (E31) | increase in comovement of inflation rates (E31) |
| persistence of inflation (E31) | decline in the level of inflation (E31) |
| volatility of inflation (E31) | decline in the level of inflation (E31) |