Abstract
We investigate the international linkages of uncertainty associated with the long-term movements of inflation. In the first step, we establish that inflation uncertainty in the G7 is intertwined, and the degree of synchronization has increased during the recent two decades. We also document a rise in inflation uncertainty accompanying the global financial crisis. Based on a factor–structural vector autoregression, we provide evidence of a common international shock. We disclose that this shock is closely related to oil and commodity price uncertainty, and it explains large parts of the recent rise in inflation uncertainty. Moreover, increased synchronization can be explained by greater relative importance of this global shock. We also document that inflation uncertainty has become more stable, because domestic shocks translate less extensively into individual economies. This finding lends support to the “good policy” hypothesis.
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