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All together now: Do international factors explain relative price co-movements?

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Recent research has found evidence of increasing co-movement in CPI inflation rates across industrialised countries. This paper considers whether this increased international co-movement in inflation rates can be attributed to greater global integration of product markets. To examine this question, we use a data set of 28 matched product category price indices for 14 advanced economies for 1998Q1 - 2008Q2, and decompose the inflation rates into a world factor, country-specific factors, and category-specific factors using a Bayesian dynamic factor model with Gibbs sampling. We find that the category-specific factors account for a large part of the co-movement in the prices of goods which are intensive in internationally traded primary commodities; but this is less evident for other traded goods. We also find that both the world factor and the category-specific factors become more significant in explaining the movement in the relative prices in the second half of our sample.

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  • Özer Karagedikli & Haroon Mumtaz & Misa Tanaka, 2010. "All together now: Do international factors explain relative price co-movements?," Reserve Bank of New Zealand Discussion Paper Series DP2010/02, Reserve Bank of New Zealand.
  • Handle: RePEc:nzb:nzbdps:2010/02
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    1. Marek Jarocinski & Frank Smets, 2008. "House prices and the stance of monetary policy," Review, Federal Reserve Bank of St. Louis, pages 339-366.
    2. Matteo Ciccarelli & Benoît Mojon, 2010. "Global Inflation," The Review of Economics and Statistics, MIT Press, pages 524-535.
    3. Clarida, Richard & Gali, Jordi & Gertler, Mark, 1998. "Monetary policy rules in practice Some international evidence," European Economic Review, Elsevier, vol. 42(6), pages 1033-1067, June.
    4. Christopher Otrok & Ayhan Kose & Mario J. Crucini, 2009. "What are the driving forces of international business cycles," 2009 Meeting Papers 820, Society for Economic Dynamics.
    5. Christopher J. Neely & David E. Rapach, 2008. "Is inflation an international phenomenon?," Working Papers 2008-025, Federal Reserve Bank of St. Louis.
    6. Ben S. Bernanke & Jean Boivin & Piotr Eliasz, 2005. "Measuring the Effects of Monetary Policy: A Factor-Augmented Vector Autoregressive (FAVAR) Approach," The Quarterly Journal of Economics, Oxford University Press, pages 387-422.
    7. Andrew Coleman, 2007. "Tradables and non-tradables inflation in Australia and New Zealand," Reserve Bank of New Zealand Bulletin, Reserve Bank of New Zealand, vol. 70, March.
    8. Mario Crucini & Ayhan Kose & Christopher Otrok, 2011. "What are the driving forces of international business cycles?," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 14(1), pages 156-175, January.
    9. Mumtaz, Haroon & Surico, Paolo, 2008. "Evolving International Inflation Dynamics: Evidence from a Time-varying Dynamic Factor Model," CEPR Discussion Papers 6767, C.E.P.R. Discussion Papers.
    10. M. Ayhan Kose & Christopher Otrok & Charles H. Whiteman, 2003. "International Business Cycles: World, Region, and Country-Specific Factors," American Economic Review, American Economic Association, pages 1216-1239.
    11. Tommaso Monacelli & Luca Sala, 2008. "The international dimension of inflation: evidence from disaggregated data," Proceedings, Board of Governors of the Federal Reserve System (U.S.).
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    Cited by:

    1. John McDermott, 2010. "Discussion of What Drives Inflation in the World?," RBA Annual Conference Volume,in: Renée Fry & Callum Jones & Christopher Kent (ed.), Inflation in an Era of Relative Price Shocks Reserve Bank of Australia.
    2. Sarlin, Peter & von Schweinitz, Gregor, 2015. "Optimizing Policymakers' Loss Functions in Crisis Prediction: Before, Within or After?," IWH Discussion Papers 6/2015, Halle Institute for Economic Research (IWH).
    3. Parker, Miles, 2016. "The impact of disasters on inflation," Working Paper Series 1982, European Central Bank.

    More about this item

    JEL classification:

    • E30 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - General (includes Measurement and Data)
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy

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