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An international perspective on the recent behavior of inflation

Author

Listed:
  • Silvio Contessi
  • Pierangelo De Pace
  • Li Li

Abstract

Several commentators have been concerned about the possibility that the euro area may be experiencing disinflation with the risk of deflation. However, the euro area is not the only economy navigating the risky waters of low inflation. Several other advanced economies have recently experienced below-target inflation as well as some actual deflation. In this article, the authors collect data for nine advanced economies and document several facts about the behavior of inflation during the 2002-14 period. First, they show that the relationship between inflation rates and short-term rates displays similar changes across advanced economies?with and without central bank programs designed to increase the size of their balance sheets (e.g., large-scale asset purchases). Second, they describe recent indications that headline and core inflation are below target for individual countries. They then discuss various explanations for this trend (global factors, output gaps, and changes in inflation expectations), showing there is some important heterogeneity across countries. Finally, they show that while output has become even more synchronized across countries since 2008, the cross-country correlation of inflation is no longer higher than the cross-country correlation of output.

Suggested Citation

  • Silvio Contessi & Pierangelo De Pace & Li Li, 2014. "An international perspective on the recent behavior of inflation," Review, Federal Reserve Bank of St. Louis, pages 267-294.
  • Handle: RePEc:fip:fedlrv:00028
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    References listed on IDEAS

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    1. Silvio Contessi & Li Li, 2013. "Forward guidance 101B: a roadmap of the international experience," Economic Synopses, Federal Reserve Bank of St. Louis.
    2. Olivier Coibion & Yuriy Gorodnichenko, 2015. "Is the Phillips Curve Alive and Well after All? Inflation Expectations and the Missing Disinflation," American Economic Journal: Macroeconomics, American Economic Association, vol. 7(1), pages 197-232, January.
    3. Laurence Ball & Sandeep Mazumder, 2011. "Inflation Dynamics and the Great Recession," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 42(1 (Spring), pages 337-405.
    4. Francisco J. Palomino & Michael F. Gallmeyer & Burton Hollifield & Stanley E. Zin, 2007. "Arbitrage-free bond pricing with dynamic macroeconomic models," Review, Federal Reserve Bank of St. Louis, issue jul, pages 305-326.
    5. Jean Imbs, 2010. "The First Global Recession in Decades," IMF Economic Review, Palgrave Macmillan;International Monetary Fund, vol. 58(2), pages 327-354, December.
    6. Gill Hammond, 2012. "State of the art of inflation targeting," Handbooks, Centre for Central Banking Studies, Bank of England, edition 4, number 29.
    7. Neely, Christopher J. & Rapach, David E., 2011. "International comovements in inflation rates and country characteristics," Journal of International Money and Finance, Elsevier, vol. 30(7), pages 1471-1490.
    8. Haroon Mumtaz & Paolo Surico, 2012. "Evolving International Inflation Dynamics: World And Country-Specific Factors," Journal of the European Economic Association, European Economic Association, vol. 10(4), pages 716-734, August.
    9. Michael Hatcher & Patrick Minford, 2016. "Stabilisation Policy, Rational Expectations And Price-Level Versus Inflation Targeting: A Survey," Journal of Economic Surveys, Wiley Blackwell, vol. 30(2), pages 327-355, April.
    10. Silvio Contessi & Li Li, 2013. "Forward guidance 101A: a roadmap of the U.S. experience," Economic Synopses, Federal Reserve Bank of St. Louis.
    11. Brett W. Fawley & Christopher J. Neely, 2014. "The evolution of Federal Reserve policy and the impact of monetary policy surprises on asset prices," Review, Federal Reserve Bank of St. Louis, pages 73-109.
    12. Roc Armenter, 2013. "The perils of nominal targets," Working Papers 14-2, Federal Reserve Bank of Philadelphia, revised 04 Feb 2014.
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    Citations

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    Cited by:

    1. Ana Maria Santacreu, 2015. "Global Monetary Policy Amidst Deflationary Concerns," Economic Synopses, Federal Reserve Bank of St. Louis.
    2. Schmidt, Sebastian, 2016. "Lack of confidence, the zero lower bound, and the virtue of fiscal rules," Journal of Economic Dynamics and Control, Elsevier, vol. 70(C), pages 36-53.
    3. Ana Maria Santacreu, 2015. "The Economic Fundamentals of Emerging Market Volatility," Economic Synopses, Federal Reserve Bank of St. Louis.

    More about this item

    JEL classification:

    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
    • F42 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - International Policy Coordination and Transmission
    • F44 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - International Business Cycles

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