Inflation as a Global Phenomenon - Some Implications for Policy Analysis and Forecasting

Abstract

We evaluate the performance of inflation forecasts based on the open-economy Phillips curve by exploiting the spatial pattern of international propagation of inflation. We model these spatial linkages using global inflation and either domestic slack or oil price fluctuations, motivated by a novel interpretation of the forecasting implications of the workhorse openeconomy New Keynesian model (Martnez-Garca and Wynne (2010), Kabukcuoglu and Martnez-Garca (2014)). We find that incorporating spatial interactions yields significantly more accurate forecasts of local inflation in 14 advanced countries (including the U.S.) than a simple autoregressive model that captures only the temporal dimension of the inflation dynamics.

JEL Classification: C21, C23, C53, F41, F62