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Inflation and Globalisation: A Dynamic Factor Model with Stochastic Volatility

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  • Joseph P. Byrne
  • Fatima Kaneez
  • Alexandros Kontonikas

Abstract

National inflation rates reflect domestic and international (regional and global) influences. The relative importance of these components remains a controversial empirical issue. We extend the literature on inflation co-movement by utilising a dynamic factor model with stochastic volatility to account for shifts in the variance of inflation and endogenously determined regional groupings. We find that most of inflation variability is explained by the country specific disturbance term. Nevertheless, the contribution of the global component in explaining industrialised countries’ inflation rates has increased over time.

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Bibliographic Info

Paper provided by Business School - Economics, University of Glasgow in its series Working Papers with number 2010_09.

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Date of creation: Jan 2010
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Handle: RePEc:gla:glaewp:2010_09

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Keywords: Inflation; Dynamic Factor Model; Stochastic Volatility; Globalisation;

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