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The global component of inflation volatility

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  • Andrea Carriero

    () (Queen Mary, University of London)

  • Francesco Corsello

    () (Bank of Italy)

  • Massimiliano Marcellino

    () (Bank of Italy)

Abstract

Global developments play an important role in domestic inflation rates. Previous literature has found that a substantial amount of the variation in a large set of national inflation rates can be explained by a single global factor. However, inflation volatility has been typically neglected, while it is clearly relevant both from a policy point of view and for structural analysis and forecasting purposes. We study the evolution of inflation rates in several countries, using a novel model that allows for commonality in both levels and volatilities, in addition to country-specific components. We find that inflation stochastic volatility is indeed important, and a substantial share of it can be attributed to a global factor that also drives the levels and persistence of inflation. While various phenomena may contribute to global inflation dynamics, it turns out that since the early 1990s, the estimated global factor is correlated with China’s PPI and with oil inflation levels and volatilities. The extent of commonality among core inflation rates and volatilities is substantially smaller than for overall inflation, which leaves scope for national monetary policies.

Suggested Citation

  • Andrea Carriero & Francesco Corsello & Massimiliano Marcellino, 2018. "The global component of inflation volatility," Temi di discussione (Economic working papers) 1170, Bank of Italy, Economic Research and International Relations Area.
  • Handle: RePEc:bdi:wptemi:td_1170_18
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    3. Fabio Busetti & Michele Caivano & Davide Delle Monache, 2019. "Domestic and global determinants of inflation: evidence from expectile regression," Temi di discussione (Economic working papers) 1225, Bank of Italy, Economic Research and International Relations Area.
    4. Lorenzo Burlon & Alessandro Notarpietro & Massimiliano Pisani, 2018. "Exchange rate pass-through into euro area inflation. An estimated structural model," Temi di discussione (Economic working papers) 1192, Bank of Italy, Economic Research and International Relations Area.
    5. Luis J. Álvarez & Ana Gómez-Loscos & María Dolores Gadea, 2019. "Inflation interdependence in advanced economies," Working Papers 1920, Banco de España;Working Papers Homepage.
    6. Ilaria De Angelis & Guido de Blasio & Lucia Rizzica, 2018. "On the unintended effects of public transfers: evidence from EU funding to Southern Italy," Temi di discussione (Economic working papers) 1180, Bank of Italy, Economic Research and International Relations Area.
    7. Efrem Castelnuovo, 2019. "Domestic and Global Uncertainty: A Survey and Some New Results," CESifo Working Paper Series 7900, CESifo.
    8. Efrem Castelnuovo, 2019. "Domestic and Global Uncertainty: A Survey and Some New Results," Melbourne Institute Working Paper Series wp2019n13, Melbourne Institute of Applied Economic and Social Research, The University of Melbourne.

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    More about this item

    Keywords

    inflation; volatility; global factors; large datasets; multivariate autoregressive index models; reduced rank regressions; forecasting;
    All these keywords.

    JEL classification:

    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • F62 - International Economics - - Economic Impacts of Globalization - - - Macroeconomic Impacts
    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
    • E37 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Forecasting and Simulation: Models and Applications
    • C53 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Forecasting and Prediction Models; Simulation Methods

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