Structural Breaks in International Inflation Linkages for OECD Countries

Abstract

This paper studies the link between domestic inflation for
19 OECD countries and a corresponding country-specific global
inflation series. This is achieved through an iterative methodology, which iterates between coefficient and variance tests, while
taking account of outliers. This procedure is applied to both
univariate and bivariate inflation models that relate domestic
and global inflation, with the latter is calculated as a tradeweighted average of inflation in a country’s trading partners.
The empirical analysis uses monthly consumer price inflation
over 1970 to 2010 and the following key results emerge. First,
the univariate analysis yields breaks in the conditional mean
that are broadly consistent with the existing literature. Second, we document clusters of variance breaks occuring around
the mid 1970s, early 1980s and early 1990s, casting doubt on
the claim in the literature that changes of the inflation has
been mainly in the mean. Third, bivariate models show a positive and strengthening contemporaneous relationship between
domestic and country specific global inflation. Although the
dates and extent of change vary over countries, our results imply increased co-movements of infation, particularly during the
1980s and 1990s. Fourth, we demonstrate that the above results crucially depend on an appropriate treatment of outliers.