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Is inflation an international phenomenon?

  • Christopher J. Neely
  • David E. Rapach

Common shocks, similarities in central bank reaction functions, and international trade potentially produce common components in international inflation rates. This paper characterizes such links in international inflation rates with a dynamic latent factor model that decomposes inflation for 65 countries into world, regional, and idiosyncratic components. The world component accounts for 34% of inflation variability on average across countries, although the importance of this global factor differs substantially across countries. Variables that reflect policy as well as economic and financial development strongly explain the cross-section variation in the relative importance of global influences. A parsimonious model of time variation in the factor loadings shows that most countries became more sensitive to international inflation influences over 1951 2006. In addition, European-specific influences became more important over time for countries participating in European economic and monetary integration.

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Paper provided by Federal Reserve Bank of St. Louis in its series Working Papers with number 2008-025.

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Date of creation: 2008
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Handle: RePEc:fip:fedlwp:2008-025
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