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Katharina Moll

25 February 2009
We examine the global dimension of inflation in 24 OECD countries between 1980 and 2007 in a traditional Phillips curve framework. We decompose output gaps and changes in unit labor costs into common (or global) and idiosyncratic components using a factor analysis and introduce these components separately in the regression. Unlike previous studies, we allow global forces to affect inflation through (the common part of) domestic demand and supply conditions. Our most important result is that the common component of changes in unit labor costs has a notable impact of inflation. We also find evidence that movements in import price inflation affect CPI inflation while the impact of movements in the common component of the output gap is unclear. A counterfactual experiment illustrates that the common component of unit labor cost changes and non-commodity import price inflation have held down overall inflation in many countries in recent years whereas commodity import price inflation has only raised the short-run volatility of inflation. In analogy to the Phillips curves, we estimate monetary policy rules with common and idiosyncratic components of inflation and the output gap included separately. Central banks have indeed reacted to the global components.
JEL Code
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
C33 : Mathematical and Quantitative Methods→Multiple or Simultaneous Equation Models, Multiple Variables→Panel Data Models, Spatio-temporal Models
C50 : Mathematical and Quantitative Methods→Econometric Modeling→General