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Global Factors and Trend Inflation

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Abstract

Many studies have shown that domestic inflation in different countries tends to behave similarly. One possible explanation for this observation is that domestic inflation dynamics are in part determined by global factors. This implies that central banks need to account for global factors when explaining and predicting inflation. Their importance however depends on whether they have long lasting effects on domestic inflation rates. Using a large macroeconomic dataset, we propose a methodology to decompose inflation into its permanent (trend) and transitory (gap) components. We then quantify the role of domestic and global factors in determining each of these components. We first apply the model to a sample of economies with long-standing inflation targeting regimes. We then extend our analysis to a sample of ten Asian economies to draw comparisons. In our first sample, we find that global factors have a sizeable influence on inflation behaviour. However, this is mainly temporary and appears to reflect movements in commodity prices. The effect of global factors on trend inflation is small. In our second sample, a set of countries with more diverse monetary policy regimes, we find global factors have a much larger role. A possible explanation is that inflation targeting may have reduced the influence of global factors on trend inflation.

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  • Güneş Kamber & Benjamin Wong, 2018. "Global Factors and Trend Inflation," Reserve Bank of New Zealand Discussion Paper Series DP2018/01, Reserve Bank of New Zealand.
  • Handle: RePEc:nzb:nzbdps:2018/1
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    More about this item

    JEL classification:

    • 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
    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics

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