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The Influence of Global Inflation on Emerging Market Economies' Inflation

Author

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  • Arango-Castillo Lenin
  • Orraca María José
  • Molina Martínez G. Stefano

Abstract

We calculate global inflation as the first principal component of inflation in a sample of emerging market and advanced economies and find that it may account for an important fraction of headline and core inflation variance across countries. We then show that global inflation is correlated with international commodity price variation, the global economic cycle, and financial volatility, but that a large fraction of its variance is unaccounted for by these factors. Finally, we augment standard inflation forecasting models for ten emerging market economies with global inflation and find that doing so improves forecasting performance for headline inflation. We argue that this predictive potential stems from its correlation with commodity prices, output gap and global financial volatility, but also from the additional information that this variable contains regarding other inflation determinants worldwide.

Suggested Citation

  • Arango-Castillo Lenin & Orraca María José & Molina Martínez G. Stefano, 2022. "The Influence of Global Inflation on Emerging Market Economies' Inflation," Working Papers 2022-15, Banco de México.
    • Handle: RePEc:bdm:wpaper:2022-15
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    File URL: https://www.banxico.org.mx/publications-and-press/banco-de-mexico-working-papers/%7B06F3DA8D-EE46-4BF5-EF7B-1E2E60F1CBEA%7D.pdf
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    More about this item

    Keywords

    Inflation; Principal Components; Forecasting and Prediction Methods;
    All these keywords.

    JEL classification:

    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • C38 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Classification Methdos; Cluster Analysis; Principal Components; Factor Analysis
    • C53 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Forecasting and Prediction Models; Simulation Methods

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