Template-Type: ReDIF-Paper 1.0
Author-Name: Güneş Kamber
Author-X-Name-First: Güneş
Author-X-Name-Last: Kamber
Author-Name: Madhusudan Mohanty
Author-X-Name-First: Madhusudan
Author-X-Name-Last: Mohanty
Author-Name: James Morley
Author-X-Name-First: James
Author-X-Name-Last: Morley
Title: Have the driving forces of inflation changed in advanced and emerging market economies?
Abstract: We construct a balanced panel dataset for 47 advanced and emerging market economies over a sample period from 1996 to 2018 to empirically investigate possible changes in the driving forces of inflation. Using an open economy hybrid Phillips curve model of inflation and formally testing for structural breaks, we find relatively little significant change in the underlying driving forces or their quantitative effects for most economies, even after the Great Financial Crisis. However, one notable change has been an increase in the average weight on expected future inflation, measured using professional forecasts, for both advanced and emerging market economies. We find very heterogeneous but significant effects of inflation expectations, domestic and foreign output gaps, exchange rate passthrough, and oil prices, with generally higher sensitivities to external driving forces for emerging market economies. Consistent with the model, the behavior of the various inflation drivers, especially what appear to be better anchored inflation expectations, can explain patterns of changes in the level and volatility of inflation across different economies.
Length: 33 pages
Creation-Date: 2020-10
File-URL: https://www.bis.org/publ/work896.pdf
File-Format: Application/pdf
File-Function: Full PDF document
File-URL: https://www.bis.org/publ/work896.htm
File-Format: text/html
Number: 896
Keywords: open economy Phillips curve, structural breaks, inflation expectations, exchange rate passthrough, inflation volatility
Classification-JEL: E31, F31, F41
Handle: RePEc:bis:biswps:896