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Inflation Tales: the Heterogenous Price Effects from Current Account Dynamics

Author

Listed:
  • António Afonso
  • José Alves
  • João Jalles
  • Sofia Monteiro

Abstract

This paper examines the impact of current account balances on energy, headline, and core inflation across developed and developing economies from 1980 to 2023. Using Panel OLS fixed effects, Panel-IV 2SLS and Panel Vector Autoregressive models, we find that an improvement in the current account consistently leads to lower inflation, with heterogeneous effects across inflation components, even when controlling for monetary policy. Our analysis also explores regional differences and contrasts the periods before and after the 2008 subprime crisis, revealing that current account surpluses had a stronger deflationary effect in the more recent period. There is also a negative link between cyclical unemployment and inflation supporting the traditional Phillips curve perspective. These results suggest that policies aimed at improving current account balances, particularly in energy-importing countries, could help mitigate inflationary pressures.

Suggested Citation

  • António Afonso & José Alves & João Jalles & Sofia Monteiro, 2024. "Inflation Tales: the Heterogenous Price Effects from Current Account Dynamics," Working Papers REM 2024/0359, ISEG - Lisbon School of Economics and Management, REM, Universidade de Lisboa.
    • Handle: RePEc:ise:remwps:wp03592024
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    File URL: https://rem.rc.iseg.ulisboa.pt/wps/pdf/REM_WP_0359_2024.pdf
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    More about this item

    Keywords

    Current Account; Energy Inflation; Headline Inflation; Core Inflation; Panel Data; VAR; Subprime Crisis; Inflation Dynamics; Monetary Policy.;
    All these keywords.

    JEL classification:

    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • F32 - International Economics - - International Finance - - - Current Account Adjustment; Short-term Capital Movements
    • Q43 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - Energy and the Macroeconomy
    • C33 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Models with Panel Data; Spatio-temporal Models

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