Dynamics of inflation in emerging markets: Is it local or global?

This paper investigates inflation dynamics in emerging markets. We apply a multi-country model (GVAR) and a time-varying Granger causality test (TVGC) to examine the drivers of inflation in Brazil, China, India, Indonesia, South Africa, and Türkiye over the period 1980Q1-2022Q4. The aim is to ascertain whether these drivers are locally or globally determined and vary over time. The GVAR model results indicate that local and global factors drive domestic inflation, collectively contributing to inflationary pressures in emerging countries. The TVGC results, on the other hand, provide strong evidence of the causality from local and global factors to domestic inflation. Local factors appear to have a stronger influence than global ones, suggesting that local dynamics play a more significant role in explaining inflation in these countries. Consequently, globalization and economic/trade integration, seen as tools to suppress inflation, can turn into factors that cause inflation in the face of a supply shock such as the one caused by the pandemic.