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Global and Domestic Inflation Filippo Ferroni and Benoit Mojon Banque de France

Global and Domestic Inflation Filippo Ferroni and Benoit Mojon Banque de France. INFLATION Monetary Policy and the Public Federal Reserve Bank of Cleveland 28-29 May 2014. Inflation: US , EA and Japan. Inflation: US , EA and Japan. Inflation: US and EA.

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Global and Domestic Inflation Filippo Ferroni and Benoit Mojon Banque de France

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  1. Global and Domestic InflationFilippo Ferroni and Benoit MojonBanque de France INFLATION Monetary Policy and the Public Federal Reserve Bank of Cleveland 28-29 May 2014

  2. Inflation: US, EA and Japan

  3. Inflation: US, EA and Japan

  4. Inflation: US and EA

  5. Inflation co-movement : US and EA

  6. Inflation co-movement : US and EA

  7. Global inflation

  8. Global inflation, 1960 to 2008:a) impressive co-movementb) low forecast errorsIs this pattern still relevant after the Great recession?

  9. Outline of the paper • Global Inflation: does it still help forecast domestic inflation? • SVAR insights on recent inflation developments • 2010-2012 : Too high • 2013-2014: Too low

  10. Outline of the results • Global Inflation: does it still help forecast domestic inflation? Yes • SVAR insights on recent inflation developments • 2010-2012 : Too high Low productivity / financial cost • 2013-2014: Too low Weak demand <= fiscal policy?

  11. Outline of the paper • Does Global Inflation help forecast domestic inflation? • Inflation co-movement • (Pseudo) out of sample forecasting performance • What does Global Inflation do to the inflation equation

  12. Inflation co-movementShare of the variance of inflation explained by GI1990-2013, 22 OECD countries

  13. Forecasting with Global Inflation • Horse race (Relative RMSE) 4 quarters ahead • UAR benchmark: π(t+4)=ρ4 π(t) • AR(1): π(t+4)=φ(L) π(t) • Factor +AR(1): π(t+4)=α(L) π(t)+ β(L) f(t), f(t)=GI(t) • Philips curves: π(t+4)=φ(L) π(t)+ θ(L) Y(t) • Commodity +AR: π(t+4)=φ(L) π(t)+ ψ(L) ComP(t) • Variations, with and withoutpriors,…

  14. Forecasting with Global Inflation • Horse race (Relative RMSE) 4 quarters ahead • UAR benchmark: π(t+4)=ρ4 π(t) • AR(1): π(t+4)=φ(L) π(t) • Factor +AR(1): π(t+4)=α(L) π(t)+ β(L) f(t), f(t)=GI(t) • Philips curves: π(t+4)=φ(L) π(t)+ θ(L) Y(t) • Commodity +AR: π(t+4)=φ(L) π(t)+ ψ(L) ComP(t) • Variations, with and withoutpriors,…

  15. Forecasting with Global Inflation • Horse race (Relative RMSE) 4 quarters ahead • UAR benchmark: π(t+4)=ρ4 π(t) • AR(1): π(t+4)=φ(L) π(t) • Factor +AR(1): π(t+4)=α(L) π(t)+ β(L) f(t), f(t)=GI(t) • Philips curves: π(t+4)=φ(L) π(t)+ θ(L) Y(t) • Commodity +AR: π(t+4)=φ(L) π(t)+ ψ(L) ComP(t) • Variations, with and withoutpriors,…

  16. Forecasting with Global Inflation • Horse race (Relative RMSE) 4 quarters ahead • UAR benchmark: π(t+4)=ρ4 π(t) • AR(1): π(t+4)=φ(L) π(t) • Factor +AR(1): π(t+4)=α(L) π(t)+ β(L) f(t), f(t)=GI(t) • Philips curves: π(t+4)=φ(L) π(t)+ θ(L) Y(t) • Commodity +AR: π(t+4)=φ(L) π(t)+ ψ(L) ComP(t) • Variations, with and withoutpriors,…

  17. Forecasting with Global Inflation • Horse race (Relative RMSE) 4 quarters ahead • UAR benchmark: π(t+4)=ρ4 π(t) • AR(1): π(t+4)=φ(L) π(t) • Factor +AR(1): π(t+4)=α(L) π(t)+ β(L) f(t), f(t)=GI(t) • Philips curves: π(t+4)=φ(L) π(t)+ θ(L) Y(t) • Commodity +AR: π(t+4)=φ(L) π(t)+ ψ(L) ComP(t) • Variations, with and withoutpriors,…

  18. Forecasting with Global Inflation • Horse race (Relative RMSE) 4 quarters ahead • UAR benchmark: π(t+4)=ρ4 π(t) • AR(1): π(t+4)=φ(L) π(t) • Factor +AR(1): π(t+4)=α(L) π(t)+ β(L) f(t), f(t)=GI(t) • Philips curves: π(t+4)=φ(L) π(t)+ θ(L) Y(t) • Commodity +AR: π(t+4)=φ(L) π(t)+ ψ(L) ComP(t) • Variations, with and withoutpriors,… 15 modelsaltogether

  19. Forecasting with GIRelative RMSE: 2008q3-2013q3

  20. Forecasting US inflation with/without GI

  21. What does GI do to the inflation equation • In sample, 1990-2013q3 regressions Factor +AR(1): π(t+4)=α(L) π(t)+ β(L) f(t), f(t)=GI(t)

  22. Absolute forecast errors, US

  23. Forecasting with GI

  24. Absolute forecast errors

  25. Outline of the paper • Global Inflation: does it still help forecast domestic inflation? Yes • SVAR insights on recent inflation developments • 2010-2012 : Too high • 2013-2014: Too low

  26. SVAR with sign restrictions • 5 variables, 1990-2013: • Exchange rate • Commodity price • Domestic GDP • Domestic CPI • Global inflation

  27. SVAR with sign restrictionsHistorical var. decomp, US

  28. SVAR with sign restrictionsHistorical var. decomp, Euro area

  29. Too high Inflation 2010-2012 • Insights from structural analyses on the US • Inflation way to high / collapse of the output gap • Hall 2011 presidential address, Beaudry and Portier • Cost of capital on marginal cost + drop in Y/L • Christiano, Eichenbaum and Trabandt, 2014,Del Negro, Giannoni and Schorfheide, 2014 • Gilchrist et al., 2013 • Oil price rebound in 2009 • $148 in July 2008 • $ 40 in January 2009 • $ 100 in January 2010

  30. Too low inflation in 2013-2014 • US: weaker demand • Fiscal policy (Christiano, Eichenbaum, Trabandt) • EA: double dip • fiscal consolidation/sovereign debt crisis

  31. Too low inflation in 2013-2014 • US: weaker demand • Fiscal policy (Christiano, Eichenbaum, Trabandt) • EA : double dip • fiscal consolidation/sovereign debt crisis • Hall’s rejection of the Philips curve • Shouldn’t EA have been lower << abyssal output gap • Conjecture: financial cost channel (CET, DGS, Gilchrist & al)

  32. Conclusion Only the world is a closed economy • Global inflation still helps forecast domestic inflation • Why inflation has been uniformly low recently in the US and the EA in spite of asymmetries • Weak world demand << fiscal policies in US and EA • Why inflation is global remains a puzzle

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