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All together now: Do international factors explain relative price co-movements?

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Abstract

Recent research has found evidence of increasing co-movement in CPI inflation rates across industrialised countries. This paper considers whether this increased international co-movement in inflation rates can be attributed to greater global integration of product markets. To examine this question, we use a data set of 28 matched product category price indices for 14 advanced economies for 1998Q1 - 2008Q2, and decompose the inflation rates into a world factor, country-specific factors, and category-specific factors using a Bayesian dynamic factor model with Gibbs sampling. We find that the category-specific factors account for a large part of the co-movement in the prices of goods which are intensive in internationally traded primary commodities; but this is less evident for other traded goods. We also find that both the world factor and the category-specific factors become more significant in explaining the movement in the relative prices in the second half of our sample.

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Paper provided by Reserve Bank of New Zealand in its series Reserve Bank of New Zealand Discussion Paper Series with number DP2010/02.

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Length: 32 p
Date of creation: Mar 2010
Date of revision:
Handle: RePEc:nzb:nzbdps:2010/02

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  1. Mario Crucini & Ayhan Kose & Christopher Otrok, 2011. "What are the driving forces of international business cycles?," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 14(1), pages 156-175, January.
  2. Mumtaz, Haroon & Surico, Paolo, 2008. "Evolving International Inflation Dynamics: Evidence from a Time-varying Dynamic Factor Model," CEPR Discussion Papers 6767, C.E.P.R. Discussion Papers.
  3. Ben Bernanke & Jean Boivin & Piotr S. Eliasz, 2005. "Measuring the Effects of Monetary Policy: A Factor-augmented Vector Autoregressive (FAVAR) Approach," The Quarterly Journal of Economics, MIT Press, vol. 120(1), pages 387-422, January.
  4. Clarida, Richard & Galí, Jordi & Gertler, Mark, 1997. "Monetary Policy Rules in Practice: Some International Evidence," CEPR Discussion Papers 1750, C.E.P.R. Discussion Papers.
  5. Matteo Ciccarelli & Benoît Mojon, 2005. "Global Inflation," Working Papers Central Bank of Chile 357, Central Bank of Chile.
  6. Christopher J. Neely & David E. Rapach, 2008. "Is inflation an international phenomenon?," Working Papers 2008-025, Federal Reserve Bank of St. Louis.
  7. Andrew Coleman, 2007. "Tradables and non-tradables inflation in Australia and New Zealand," Reserve Bank of New Zealand Bulletin, Reserve Bank of New Zealand, vol. 70, March.
  8. Tommaso Monacelli & Luca Sala, 2008. "The international dimension of inflation: evidence from disaggregated data," Proceedings, Board of Governors of the Federal Reserve System (U.S.).
  9. M. Ayhan Kose & Christopher Otrok & Charles H. Whiteman, 2003. "International Business Cycles: World, Region, and Country-Specific Factors," American Economic Review, American Economic Association, vol. 93(4), pages 1216-1239, September.
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Cited by:
  1. John McDermott, 2010. "Discussion of What Drives Inflation in the World?," RBA Annual Conference Volume, in: Renée Fry & Callum Jones & Christopher Kent (ed.), Inflation in an Era of Relative Price Shocks Reserve Bank of Australia.

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