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INTERNATIONAL SYNCHRONIZATION AND CHANGES IN LONG-TERM INFLATION UNCERTAINTY

Published online by Cambridge University Press:  08 April 2016

Steffen R. Henzel  and
Elisabeth Wieland
Steffen R. Henzel*
Affiliation:
University of Munich
Elisabeth Wieland
Affiliation:
University of Munich
*
Address correspondence to: Steffen R. Henzel, Ifo Institute—Leibniz Institute for Economic Research at the University of Munich, Poschingerstrasse 5, 81679 Munich, Germany; e-mail: [email protected].
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Abstract

We investigate the international linkages of uncertainty associated with the long-term movements of inflation. In the first step, we establish that inflation uncertainty in the G7 is intertwined, and the degree of synchronization has increased during the recent two decades. We also document a rise in inflation uncertainty accompanying the global financial crisis. Based on a factor–structural vector autoregression, we provide evidence of a common international shock. We disclose that this shock is closely related to oil and commodity price uncertainty, and it explains large parts of the recent rise in inflation uncertainty. Moreover, increased synchronization can be explained by greater relative importance of this global shock. We also document that inflation uncertainty has become more stable, because domestic shocks translate less extensively into individual economies. This finding lends support to the “good policy” hypothesis.

Keywords

Inflation UncertaintyFactor–Structural VARStochastic Volatility
Type
Articles
Information
Macroeconomic Dynamics , Volume 21 , Issue 4 , June 2017 , pp. 918 - 946
Copyright
Copyright © Cambridge University Press 2016 

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Footnotes

We would like to thank Kai Carstensen, Helmut Herwartz, Matthias Hartmann, and participants at the 17th Spring Meeting of Young Economists, at the Annual Congress of the Verein für Socialpolitik 2012, at the CESifo Area Conference on Macro, Money and International Finance 2013, and at the Asian Meeting of the Econometric Society 2013 for very valuable comments and suggestions. Financial support from the German Research Foundation (Grant No. CA 833/2) is gratefully acknowledged.

References

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