Is Inflation Domestic or Global? Evidence from Emerging Markets

Following a period of disinflation during the 1990s and early 2000s, inflation in emerging markets has remained remarkably low. The volatility and persistence of inflation also fell considerably and remained low despite large swings in commodity prices, the global financial crisis, and periods of strong and sustained U.S. dollar appreciation. A key question is whether this improved inflation performance is sustainable or reflects global disinflationary forces that could prove temporary. In this paper, we use a New Keynesian Phillips-curve framework and data for 19 large emerging market economies over 2004–18 to assess the contribution of domestic and global factors to domestic inflation dynamics. We find that long-term inflation expectations, linked to domestic factors, were the main determinant of inflation. External factors played a considerably smaller role. The results suggest that although emerging markets are increasingly integrated into the global economy, policymakers still hold significant leverage in domestic inflation developments.