This paper studies the globalisation of CPI inflation by analysing core, energy and food components, testing for structural breaks in the relationships between domestic inflation and a corresponding country-specific foreign inflation series at the monthly frequency for OECD countries. The iterative methodology employed separates coefficient and variance breaks, while also taking account of outliers. We find that the overall pattern of globalisation in aggregate inflation is largely driven by convergence of the mean levels of the core component from the early 1990s, compatible with the introduction of inflation targeting in many countries of our sample. There is less evidence of increased synchronisation of shortrun movements in core than aggregate inflation, but an increased role for shortrun foreign energy inflation often contributes to the globalisation effect.
Rather than relying on a potentially poor point estimate of a coefficient break date when forecasting, this paper proposes averaging forecasts over sub-samples indicated by a confidence interval or set for the break date. Further, we examine whether explicit consideration of a possible variance break and the use of a two-step methodology improves forecast accuracy compared with using heteroskedasticity robust inference. Our Monte Carlo results and empirical application to US productivity growth show that averaging using the likelihood ratio-based confidence set typically performs well in comparison with other methods, while two-step inference is particularly useful when a variance break occurs concurrently with or after any coefficient break.
This paper studies the globalisation of CPI inflation by analysing core, energy and food components, testing for structural breaks in the relationships between domestic inflation and a corresponding country-specific foreign inflation series at the monthly frequency for OECD countries. The iterative methodology employed separates coefficient and variance breaks, while also taking account of outliers. We find that the overall pattern of globalisation in aggregate inflation is largely driven by convergence of the mean levels of the core component from the early 1990s, compatible with the introduction of inflation targeting in many countries of our sample. There is less evidence of increased synchronisation of shortrun movements in core than aggregate inflation, but an increased role for shortrun foreign energy inflation often contributes to the globalisation effect.
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