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International Inflation Spillovers Through Input Linkages

Listed author(s):
  • Raphael A. Auer
  • Andrei A. Levchenko
  • Philip Sauré

We document that observed international input-output linkages contribute substantially to synchronizing producer price inflation (PPI) across countries. Using a multi-country, industry-level dataset that combines information on PPI and exchange rates with international and domestic input-output linkages, we recover the underlying cost shocks that are propagated internationally via the global input-output network, thus generating the observed dynamics of PPI. We then compare the extent to which common global factors account for the variation in actual PPI and in the underlying cost shocks. Our main finding is that across a range of econometric tests, input-output linkages account for half of the global component of PPI inflation. We report three additional findings: (i) the results are similar when allowing for imperfect cost pass-through and demand complementarities; (ii) PPI synchronization across countries is driven primarily by common sectoral shocks and input-output linkages amplify co-movement primarily by propagating sectoral shocks; and (iii) the observed pattern of international input use preserves fat-tailed idiosyncratic shocks and thus leads to a fat-tailed distribution of inflation rates, i.e., periods of disination and high inflation.

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File URL: http://www.cesifo-group.de/portal/page/portal/DocBase_Content/WP/WP-CESifo_Working_Papers/wp-cesifo-2017/wp-cesifo-2017-03/cesifo1_wp6395.pdf
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Paper provided by CESifo Group Munich in its series CESifo Working Paper Series with number 6395.

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Date of creation: 2017
Handle: RePEc:ces:ceswps:_6395
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  1. Ariel Burstein & Christopher Johann Kurz & Linda Tesar, 2004. "Trade, Production Sharing and the International Transmission of Business Cycles," Working Papers 522, Research Seminar in International Economics, University of Michigan.
  2. Nikhil Patel & Zhi Wang & Shang-Jin Wei, 2014. "Global Value Chains and Effective Exchange Rates at the Country-Sector Level," NBER Working Papers 20236, National Bureau of Economic Research, Inc.
  3. Gagnon, Etienne & Mandel, Benjamin R. & Vigfusson, Robert J., 2012. "Missing Import Price Changes and Low Exchange Rate Pass-Through," International Finance Discussion Papers 1040, Board of Governors of the Federal Reserve System (U.S.), revised 12 Dec 2012.
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