The Spillover of Inflation among the G7 Countries

Abstract

Many global shocks, including the renegotiation of NAFTA, the United States–China trade war, the Brexit, and the COVID-19 pandemic, may have recently influenced the inflation spillover in the G7 countries. The current literature overlooks the influence of these important events on the inflation spillover of the G7 countries. This study fulfills this gap and investigates the nature of inflation spillover in the short, medium, and long term. Using the monthly data from 1956:6 to 2020:12, the study finds that Japan and the United States are the main transmitters of inflation. International trade, purchasing power parity, low-cost technology, and the Abenomics policy were found to be responsible for the inflation spillover. We suggest that the central banks of these countries collaborate to achieve the targeted inflation rate.

Granular inflation spillovers

“…Istiak et al. (2021) studied the inflation spillover in the G7 countries and concluded that Japan is the primary transmitter of inflation, followed by the USA.…”

“…For example, inflation in the Eurozone affects US inflation expectations, making models based on the term structure ineffective in predicting long-term inflation (Ciccareli and Garcia, 2015). Istiak et al. (2021) evaluate inflation spillovers among the G7 countries and find that Japan and the USA are the most prominent “exporters” of inflation.…”

“…For example, inflation in the Eurozone affects US inflation expectations, making models based on the term structure ineffective in predicting long-term inflation (Ciccareli and Garcia, 2015). Istiak et al (2021) evaluate inflation spillovers among the G7 countries and find that Japan and the USA are the most prominent "exporters" of inflation. Baurle et al (2021) show how inflationary shocks cause heterogeneous inflation spillovers for Switzerland, and Balcilar and Bekun (2020) discover the importance of inflation spillovers to commodity prices in Nigeria.…”

Drivers and spillover effects of inflation: the United States, the euro aarea, and the United Kingdom

“…To empirically investigate the cause of the inflation surge since the pandemic, Shapiro Inflation spillovers among the major economies have been discussed in the literature precovid (Auer, Levchenko and Sauré, 2019;Bäurle, Gubler and Känzig, 2021;Istiak et al, 2021).…”

“…They found that half of the Swiss price variations could be explained by foreign inflationary shocks. Using monthly data from 1956M6 to 2020M12, Istiak et al (2021) examined the inflation spillover among G7 countries with a VAR model. They found that U.S.…”