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Is nature of inflation co-movement time-varying? Insights from a dynamic factor model

Author

Listed:
  • Nazlioglu, Saban
  • Akin, Tugba
  • Gurel, Sinem Pinar
  • Gunes, Sevcan

Abstract

The purpose of this study is to examine whether inflation co-movement has a time-varying behavior. We estimate a dynamic factor model with time-varying variances and obtain variance decomposition for G7 countries from 1970 to 2023. The results reveal that (i) inflation co-movement tends to change with global shocks, with a more synchronized pattern during global financial crisis and COVID-19; and (ii) it tends to cluster across countries after COVID-19, with an increase in US, Canada, and Japan and a decrease in European countries (France, Germany, Italy, and UK). These findings hence provide new insights on time-varying inflation co-movement.

Suggested Citation

  • Nazlioglu, Saban & Akin, Tugba & Gurel, Sinem Pinar & Gunes, Sevcan, 2025. "Is nature of inflation co-movement time-varying? Insights from a dynamic factor model," Economics Letters, Elsevier, vol. 247(C).
    • Handle: RePEc:eee:ecolet:v:247:y:2025:i:c:s0165176525000527
    DOI: 10.1016/j.econlet.2025.112215
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    More about this item

    Keywords

    Inflation; Time-varying co-movement; Dynamic factor model; State-space method;
    All these keywords.

    JEL classification:

    • C33 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Models with Panel Data; Spatio-temporal Models
    • C38 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Classification Methdos; Cluster Analysis; Principal Components; Factor Analysis
    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • E50 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - General

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