International Inflation Research Articles

Commodity prices and international Inflation, 1851–1913

This paper uses annual data to study the impact of commodity prices on consumer prices in 15 economies from 1851 to 1913. We calculate a simple measure of the common component of commodity prices which co-moves with the international business cycle and Granger causes consumer price inflation. Commodity prices are significant in standard inflation equations estimated by OLS in 14 of 15 economies. Estimating these equations using real shipping costs as an instrument suggests that commodity price movements associated with shifts in demand arising from international business cycles have a particularly large impact on inflation.

Dynamic connectedness of inflation around the world: A time-varying approach from G7 and E7 countries

Using advanced econometric techniques of the Time-Varying Parameters Vector Autoregression model with stochastic volatility (TVP-SV-VAR) and the Quantile Vector Autoregression (QVAR) model, this research investigates the dynamics of the Consumer Price Index (CPI) across G7 and E7 countries from January 1993 to January 2023, aiming to comprehensively analyze the international transmission of inflation. The study yields several key findings. Firstly, we ascertain that approximately 64% of inflation volatility can be attributed to international transmission. Secondly, our analysis consistently identifies Turkey and Russia as net exporters of inflation over the study period, while G7 countries and Mexico emerge as persistent net importers. Thirdly, we note a gradual increase in China's inflation connectivity with developing countries following the Asian financial crisis, coupled with a diminishing impact of Chinese inflation transmission to developed nations. Fourthly, we observe a heightened complexity in the inflation transmission network during periods marked by high Total Connectivity Index (TCI) values, compared to those with low TCI values. Lastly, our study underscores that the transmission of international inflation intensifies during periods characterized by extremely high or low international inflation rates.

Forecasting food price inflation during global crises

AbstractIn this paper, we consider the forecasting of domestic food price inflation (DFPI) using global indicators, with emphasis on episodes of macroeconomic turbulence, namely, the Global Financial Crisis (GFC) and the COVID‐19 pandemic and its subsequent repercussions. Our monthly dataset covers about two decades for more than a hundred economies. We employ dynamic model averaging (DMA) to tackle both model uncertainty and parameter instability and produce pseudo out‐of‐sample forecasts. Thus, we are able to focus on the forecasting ability of the global predictors of DFPI before and during the global crises. We find evidence that the DMA specification tends to outperform statistical models frequently used in the literature such as random walks, autoregressive models, and time‐varying parameter models, especially during global crises. We also identify the most successful predictors during the crises using their posterior probabilities of inclusion. By comparing the distributions of such probabilities, we find that the international food price inflation is the most useful predictor of DFPI for numerous countries during both crises. Other indicators such as domestic CPI inflation as well as the international inflation of agricultural commodities, fertilizers, and other food categories improved their forecasting ability, particularly during the COVID‐19 period.

International co-movements of inflation, 1851–1913

Abstract We study inflation in a group of 15 countries before and during the classical Gold Standard using annual data spanning 1851–1913. The degree of co-movements between domestic and international inflation depends on geographical remoteness and openness to trade. Furthermore, international inflation acts as an ‘attractor’ for domestic inflation. Sub-sample estimates reveal little evidence of instability implying that international inflation was an important influence on domestic inflation throughout this time period.

International Inflation Spillovers from a Flight to Safe Assets

International Inflation Spillovers from a Flight to Safe Assets

Granular inflation spillovers

PurposeThe authors test the granularity hypothesis to international inflation spillovers using annual exports and inflation data for 138 countries from 1991 to 2020. This study aims to discuss the aforementioned objective.Design/methodology/approachFirst, the authors quantify the power law for the right tail of the export volumes distribution and discuss its implications. Then, the authors compute the granular residual, a measure of shocks to the largest countries.FindingsThe authors find export volumes across countries are not Gaussian-distributed but follow a power law. This finding means the largest countries disproportionately impact world inflation. In addition, the authors find that countries with higher relative weight in international trade determine a portion of international spillovers greater than their trade share. Moreover, eight big grains are responsible for the bulk of inflation spillovers.Practical implicationsThe policy implication is that other countries' central banks should closely monitor the eight big grains when conducting their domestic monetary policy.Originality/valueThis is the first study spotting the problem of granular inflation spillovers.

The Disadvantages of Sovereign Currency as the World Currency

From the perspective of Marx’s theory of the functioning of the international monetary system, there are inherent disadvantages in a sovereign currency acting as the world currency. First, the existing model of the single world currency is unfair, with the country whose sovereign currency functions as the world currency able to obtain huge international seigniorage and international inflation tax. Second, this single world currency model is unstable. The premise behind the functioning of an international monetary means of payment is the strong credit of currency-issuing countries, but the Triffin problem means that the sovereign currency issuers face a dilemma. Third, the duality of the monetary measure of value determines that there can be only one currency performing the function of a world currency in the international market, and a multipolar world currency pattern will lead to frictions among currency-issuing countries. Recognizing the disadvantages of using a sovereign currency as the world currency has important reference value and educative significance for achieving a correct view of digital currency, eSDRs, and RMB internationalization.

Editorial

Editorial

Expectation spillovers and the return of inflation

Can the sharp rises in US inflation and inflation compensation in 2021 signal a return of inflation worldwide? In addition to international spillovers from US headline inflation, this paper provides evidence of quantitatively important effects from US inflation compensation not only on domestic but also on international inflation. Specifically, using the euro area as an example, we unveil an expectation channel that operates through inflation compensation markets and reinforces international spillovers from US inflation. These spillovers suggest that the implementation of average inflation targeting by the US Federal Reserve could be an important factor in the recovery of euro area and worldwide inflation.

‘Macro-finance determinants and the stock market development: evidence from Morocco’

ABSTRACT This paper focuses on the role of the macroeconomic outlook in explaining the returns volatility from 1998 to 2018 in Morocco. Our findings show that the inclusion of low-frequency macroeconomic information can improve the explaining ability, particularly for the long-term variance component. Information in some indicators which represent forward-looking variables (i.e. international economic situation, interest rates, exchange rates and inflation) seem to take into account the current economic situation, and remain useful in the Moroccan stock market development. Nevertheless, the historical realized volatility exceeds all models with macro-finance data in terms of explaining the long-term volatility. Therefore, it is noteworthy that investors and decision makers are considered to be more affected by the stock results, namely the past returns performance and the historical volatility. In general, modeling the long-term volatility component has a great potential and is very useful for portfolio selection, hedging decisions and macroeconomic risk management.

Impact of International Trade and Inflation on Indias Industrial Growth: An Empirical Investigation

Impact of International Trade and Inflation on Indias Industrial Growth: An Empirical Investigation

Environmental innovations, income distribution, international competitiveness and environmental policies: a Kaleckian growth model with a balance of payments constraint

The article integrates a baseline Kaleckian model with a balance of payments constrained growth for addressing the interaction among: income distribution, international competitiveness and environmental innovation taking into account the proactive role of environmental policies The crucial link is given by intermediate inputs (raw materials and energy) in the Kaleckian price equation, which impacts on real wages, the wage share, the rate of capital utilization (and hence growth) and international competitiveness (through changes in domestic prices for a given international inflation rate). It is shown that an economy which has higher energy efficiency will attain at the same time a higher wage share and higher growth. Being green not only helps attain a more sustainable growth path, but also a more inclusive one both in the short run and the medium-run. In the long-run, within a balance of payments constraint, the combination of green taxes with an industrial policy aimed at increasing the energy efficiency of production and the diversification of the economy is crucial to raise the wage share and sustain growth.

An Aggregate-Level Macro Model for the Indian Economy

We make an empirical attempt to model the Indian economy at an aggregate level with annual data, ranging from 1980 to 2019. Our major theoretical premise mimics the New Keynesian framework, which is based on the microeconomic foundations of Keynesian economics. We propose a whole economic structure in the form of nine equations. Aggregate demand is modeled with the help of four equations, representing consumption, private investment, exports, and imports. Aggregate supply assumes the form of a simple neoclassical production function where labor, capital, and exogenous technical progress are considered as inputs. Further, inflation is assumed to follow a New Keynesian representation whereas the LM curve has its standard form with income and short-term rate of interest as its determinants. Subsequently, a linking equation, expressing long-run interest rates as a function of short-term interest rates and government investment, is proposed to unify monetary policy and fiscal policy to the goods market. Finally, tax is estimated as a function of per capita income. A structural equation model is employed for the empirical analysis and findings support the theoretical expectations. Consumption follows the absolute income hypothesis, and private investment is governed by the accelerator principle. Further, the negative sign of nominal interest rates in the investment function confirms an inverse relation between the former and private capital formation. Exports are found to be influenced by world income, exchange rates, and government capital formation, and import demand is determined by domestic income, the difference between domestic and international inflation, and the lagged exchange rate. From the policy perspective, we suggest the suitability of fiscal and monetary policies for increasing growth in the Indian economy. However, the effectiveness of expansionary fiscal policy is observed to have a larger impact on growth than easy monetary policy. This inference is drawn mainly on the basis of a simulation exercise for the proposed structural equation model.

Heuristics versus econometrics as a basis for forecasting international inflation differentials

PurposeThis study aims to address the issue of prediction of inflation differences for an economy that considers either fixing its exchange rate or joining a currency union. In this setting, individual countries have limited control over their inflation, and anticipating the possible course of domestic inflation relative to inflation abroad becomes an important input in policy-making. In this context, the author compares simple forecast heuristics and econometric modeling.Design/methodology/approachThe study compares two basically different approaches. The first approach of forecasting consists of simple heuristics. Various heuristics are considered that differ with respect to the economic reasoning that goes into quantifying the forecast rules. The simplest such forecasting heuristic suggests that the average over all available observations of inflation differentials should be taken as a predictor for the future. Bringing more economic insight to bear suggests a further heuristic according to which historical inflation differentials should be adjusted for changes in the nominal exchange rate. A further variant of this approach suggests that a forecast should exclusively rely on data from earlier times under a pegged exchange rate. A fundamentally different approach to prediction builds on dynamic econometric models estimated by using all available historical data independent of the currency regime.FindingsThe author studies three small member countries of the Eurozone, i.e. Finland, Luxembourg and Portugal. For the evaluation of the various forecasting strategies, he performs out-of-sample predictions over a horizon of five years. The comparison of the four different forecasting strategies documents that the variant of the forecast heuristic that draws on data from earlier experiences under fixed exchange rates performs better than the forecast based on the estimated econometric model.Practical implicationsThe findings of this study provide helpful guidelines for countries considering either joining a currency union or fixing their exchange rate. The author shows that a simple forecasting heuristic gives sound advice for assessing the likely course of inflation.Originality/valueThis study describes how economic theory can guide the selection of historical data for assessing likely future developments. The analysis shows that using a simple heuristic based on historical analogy can lead to better forecasts than the analytically more sophisticated approach of econometric modeling.

Analysing the spillover of inflation in selected Euro-area countries

We examined the spillover of inflation in selected Euro-area countries using monthly consumer price index (CPI) based inflation data covering the period 1955M1 to 2017M4. To achieve our objective, we used two recently developed methods of spillover: a time-domain spillover method, Diebold–Yilmaz (hereafter referred as DY method) and a frequency-domain method, Barunik–Krehlik (hereafter referred as BK method). We analysed 1–4 months and more than 4 months spillovers. The study has importance because the co-movement in the international inflation rates, among others, may be produced by common shocks, similarities in central bank reaction functions, international trade and the operation of purchasing power parity theory. However, to assess the synchronisation of inflation fluctuations across countries or regions, it is critical to understand the inflation behaviour and formulation of correct monetary policy.

Does History Help Predict International Inflation Differentials?

Purpose: This study addresses the issue of prediction of inflation differences for an economy that considers either fixing its exchange rate or joining a currency union. In this setting individual countries have limited control over their inflation and anticipating the possible course of domestic inflation relative to inflation abroad becomes an important input in policy making. In this context, we compare simple forecast heuristics and econometric modeling. Design/methodology/approach: We compare two basically different approaches. The first approach of forecasting consists of simple heuristics. Various heuristics are considered that differ with respect to the economic reasoning that goes into quantifying the forecast rules. The simplest such forecasting heuristic suggests that the average over all available observations of inflation differentials should be taken as a predictor for the future. Bringing more economic insight to bear suggests a further heuristic according to which historical inflation differentials should be adjusted for changes in the nominal exchange rate. A further variant of this approach suggests that a forecast should exclusively rely on data from earlier times under a pegged exchange rate. A fundamentally different approach to prediction builds on dynamic econometric models estimated by using all available historical data independent of the currency regime. Findings: We study three small member countries of the Eurozone, i.e., Finland, Luxembourg, and Portugal. For the evaluation of the various forecasting strategies we perform out-of-sample predictions over a horizon of five years. The comparison of the four different forecasting strategies documents that the variant of the forecast heuristic that draws on data from earlier experiences under fixed exchange rates performs better than the forecast based on the estimated econometric model. Practical Implications: The findings of this study provide helpful guidelines for countries considering either joining a currency union or fixing their exchange rate. We show that a simple forecasting heuristic gives sound advice for assessing the likely course of inflation. Originality: This study describes how economic theory can guide the selection of historical data for assessing likely future developments. The analysis shows that using a simple heuristic based on the historical analogy can lead to better forecasts than the analytically more sophisticated approach of econometric modeling.

INTERNATIONAL OUTPUT AND INFLATION UNCERTAINTY AND THEIR IMPACT ON COUNTRIES' MACROECONOMIC PERFORMANCE. EVIDENCE FROM A DYNAMIC FACTOR GARCH-IN-MEAN MODEL

We identify international output and inflation uncertainty and analyze their impact on individual countries' macroeconomic performance. Output and inflation uncertainty on an international level is measured through the conditional variances of common factors in inflation and output growth, estimated from a bivariate dynamic factor model with GARCH errors. The impact of international and country-specific uncertainty is analyzed by including the conditional variances as regressors. We find increases in uncertainty during the first and second oil crisis, the 1980s and 1990s recessions as well as the recent Great Recession to be confined to the international level. The effect of international uncertainty results to be highly significant and unambiguously negative on countries' output growth and inflation rates whereas the impact of country-specific uncertainty is very mixed.

Dynamics of Current Account Deficit: A Kenyan Experience

Large and persistent current account deficits are among the most serious problems of many developing countries. The Current Account in Kenya has continuously been in deficit in the last three decades prompting the country to rely increasingly on risky short-term flows to balance the accounts. This has consistently created a financing gap. The purpose of this study was to provide empirically characterization of the dynamics of current account deficit and other macroeconomic variables. Based on the absorption approach, the study established the persistence and determinants of the current account deficit; Explanatory research design was adopted. Due to the time series nature of the study, Multivariate Vector Autoregressive, Granger causality test together with Variance decomposition and impulse response functions were used to empirically establish the determinants and dynamics of the current account deficit. The results indicate that current account deficit, gross domestic product growth, inflation and foreign direct investment are I(0). Degree of openness, terms of trade, external debt stock, foreign exchange, gross domestic savings, fiscal deficit, exports and imports are . The major determinants of the current balance are the degree of openness, terms of trade, oil price on the international market and inflation. The variance in the current account is better explained by its own shocks followed by shocks from degree of openness, fiscal deficit, terms of trade, external debt of stock, foreign direct investment, growth rate of gross domestic product, and inflation. From the findings, the study recommends the Country to focus on current account targeting policies together with policies that focus on increasing and stabilizing gross domestic product in order to increase exports and its competitiveness and focus on policies that reduce the burden of depending on oil from the world market.

Causal relationship of stock performance and macroeconomic variables: Empirical evidences from Brazil, Russia, India and China (BRIC)

The rise of BRIC (Brazil, Russia, India and China) in the global investment market is still too mysterious to investors. This paper attempts to investigate the causal relationship among quarterly returns of BRIC’s stock market indices using a set of pre-examined macroeconomic variables such as, economic growth (GDP), risk free rates (the U.S. t-bill rates), exchange rates against USD, international oil prices and inflation in order to understand the leading factor of BRIC’s stock market returns. This paper covers the sample period from 1996:Q4 to 2013:Q1. The error correction model and Granger causality approach were applied to investigate the relationship among the variables. The results indicate that none of the explanatory variables Granger cause stock market performance in China and India. In homogenous, there is Granger causality from BRIC’s stock market performance to the risk free rates and international oil prices. This finding implies that BRIC has strong market impact or purchasing power to influence the key raw input of an economy, as well as the largest risk free investment instrument in the world. Generally, the Fed model, international trading effect and portfolio balance model are inapplicable to BRIC. The safest investment guidance for investors is to follow the changes in oil prices to forecast the movement in stock performance in Brazil. This is because there is an actual sign (from the error correction model) and significant pairwise Granger causality between stock market returns and oil prices in Brazil. Key words : stock market performance, macroeconomic variables, granger causality, risk free rates; unit root tests, cointegration tests

International Inflation Spillovers through Input Linkages

We document that international input-output linkages contribute substantially to synchronizing producer price inflation (PPI) across countries. Using a multicountry, industry-level data set that combines information on PPI and exchange rates with global input-output linkages, we recover the underlying cost shocks that are propagated internationally via the global input-output network, thus generating the observed dynamics of PPI. We then compare the extent to which common global factors account for the variation in actual PPI and in the underlying cost shocks. Across a range of econometric tests, input-output linkages account for half of the global component of PPI inflation.