Citation

Discussion Paper Details

Please find the details for DP13470 in an easy to copy and paste format below:

Full Details

Title: The Global Component of Inflation Volatility

Author(s): Andrea Carriero, Francesco Corsello and Massimiliano Marcellino

Publication Date: January 2019

Keyword(s): Forecasting, Global factors, inflation, large datasets, Multivariate Autoregressive Index models, Reduced Rank Regressions and volatility

Programme Area(s): International Macroeconomics and Finance and Monetary Economics and Fluctuations

Abstract: Global developments play an important role for domestic inflation rates. Earlier literature has found that a substantial amount of the variation in a large set of national inflation rates can be explained by a single global factor. However, inflation volatility has been typically neglected, while it is clearly relevant both from a policy point of view and for structural analysis and forecasting. We study the evolution of inflation rates in several countries, using a novel model that allows for commonality in both levels and volatilities, in addition to country-specific components. We find that inflation volatility is indeed important, and a substantial fraction of it can be attributed to a global factor that is also driving inflation levels and their persistence. While various phenomena may contribute to global inflation dynamics, it turns out that since the early '90s level and volatility of the estimated global factor are correlated with the Chinese PPI and Oil inflation. The extent of commonality among core inflation rates and volatilities is substantially smaller than for overall inflation, which leaves scope for national monetary policies. Finally, we show that the point and density forecasting performance of the model is good relative to standard benchmarks, which provides additional evidence on its reliability.

For full details and related downloads, please visit: https://cepr.org/active/publications/discussion_papers/dp.php?dpno=13470

Bibliographic Reference

Carriero, A, Corsello, F and Marcellino, M. 2019. 'The Global Component of Inflation Volatility'. London, Centre for Economic Policy Research. https://cepr.org/active/publications/discussion_papers/dp.php?dpno=13470