Skip to main content
Top
Published in: Journal of Economics and Finance 3/2022

02-06-2022

The impact of global economies on US inflation: A test of the Phillips curve

Authors: Hany Guirguis, Vaneesha Boney Dutra, Zoe McGreevy

Published in: Journal of Economics and Finance | Issue 3/2022

Log in

Activate our intelligent search to find suitable subject content or patents.

search-config
loading …

Abstract

Understanding the relationship between employment and inflation is of great interest to policymakers and market participants. This paper introduces a new global inflation measure based on the principal component analysis (PCA) of the inflation rates of major US trade partners. We find that US domestic inflation correlates strongly with global inflation in the short- and long term. Moreover, global inflation leads the US inflation and accounts for 80% of the price discovery process. Additionally, we show that the Phillips curve equation improves in-sample and out-of-sample forecasting of US inflation rates by incorporating our spill-over-based global inflation (SGI) measure. Also, the utilization of the SGI in the Phillips equation increases the responsivity of the inflation rate data to the unemployment gap by 37%. In summary, the present results support the hypothesis that global inflation is a crucial determinant of domestic (US) inflation. The paper's main findings draw vital policy implications that emphasize the need for stronger cooperation among central banks to cope with the spill-over effect of global inflations on domestic economies.

Dont have a licence yet? Then find out more about our products and how to get one now:

Springer Professional "Wirtschaft+Technik"

Online-Abonnement

Mit Springer Professional "Wirtschaft+Technik" erhalten Sie Zugriff auf:

  • über 102.000 Bücher
  • über 537 Zeitschriften

aus folgenden Fachgebieten:

  • Automobil + Motoren
  • Bauwesen + Immobilien
  • Business IT + Informatik
  • Elektrotechnik + Elektronik
  • Energie + Nachhaltigkeit
  • Finance + Banking
  • Management + Führung
  • Marketing + Vertrieb
  • Maschinenbau + Werkstoffe
  • Versicherung + Risiko

Jetzt Wissensvorsprung sichern!

Springer Professional "Wirtschaft"

Online-Abonnement

Mit Springer Professional "Wirtschaft" erhalten Sie Zugriff auf:

  • über 67.000 Bücher
  • über 340 Zeitschriften

aus folgenden Fachgebieten:

  • Bauwesen + Immobilien
  • Business IT + Informatik
  • Finance + Banking
  • Management + Führung
  • Marketing + Vertrieb
  • Versicherung + Risiko




Jetzt Wissensvorsprung sichern!

Literature
go back to reference Abdelsalam MA (2017) Improving Phillips curve’s inflation forecasts under misspecification. Rom J Econ Forecast XX:54–76 Abdelsalam MA (2017) Improving Phillips curve’s inflation forecasts under misspecification. Rom J Econ Forecast XX:54–76
go back to reference Akerlof G, Dickens W, Perry G (1996) The Macroeconomics of Low Inflation. Brook Pap Econ Act 1:1–59CrossRef Akerlof G, Dickens W, Perry G (1996) The Macroeconomics of Low Inflation. Brook Pap Econ Act 1:1–59CrossRef
go back to reference Albuquerque B, Baumann U (2017) Will US inflation awake from the dead? The role of slack and non-linearities in the Phillips curve. Journal of Policy Modeling 39(2):247–271CrossRef Albuquerque B, Baumann U (2017) Will US inflation awake from the dead? The role of slack and non-linearities in the Phillips curve. Journal of Policy Modeling 39(2):247–271CrossRef
go back to reference Alvarez-Diaz M, Gupta R (2016) Forecasting US consumer price index: Does nonlinearity matter? Appl Econ 48(46):4462–4475CrossRef Alvarez-Diaz M, Gupta R (2016) Forecasting US consumer price index: Does nonlinearity matter? Appl Econ 48(46):4462–4475CrossRef
go back to reference Auer RA, Levchenko AA, Saure P (2019) International inflation spillovers through input linkages. Rev Econ Stat 101(3):507–521CrossRef Auer RA, Levchenko AA, Saure P (2019) International inflation spillovers through input linkages. Rev Econ Stat 101(3):507–521CrossRef
go back to reference Auer RA, Borio C, Filardo A (2017) The Globalisation of inflation: The growing importance of global value chains. Federal Reserve Bank of Dallas Working Paper No. 300 Auer RA, Borio C, Filardo A (2017) The Globalisation of inflation: The growing importance of global value chains. Federal Reserve Bank of Dallas Working Paper No. 300
go back to reference Balcilar M, Gupta R, Jooste C (2017) Long memory, economic policy uncertainty and forecasting US inflation: A Bayesian VARFIMA approach. Appl Econ 49(11):1047–1054CrossRef Balcilar M, Gupta R, Jooste C (2017) Long memory, economic policy uncertainty and forecasting US inflation: A Bayesian VARFIMA approach. Appl Econ 49(11):1047–1054CrossRef
go back to reference Ball L, Mazumder S (2019) A Phillips curve with anchored expectations and short-term unemployment. J Money, Credit, Bank 51(1):111–137CrossRef Ball L, Mazumder S (2019) A Phillips curve with anchored expectations and short-term unemployment. J Money, Credit, Bank 51(1):111–137CrossRef
go back to reference Ball L, Romer D (1991) Sticky prices as coordination failure. Am Econ Rev 81(3):539–552 Ball L, Romer D (1991) Sticky prices as coordination failure. Am Econ Rev 81(3):539–552
go back to reference Barkham R, Geltner D (1995) Price discovery in American and British property markets. Real Estate Economics 23:21–44CrossRef Barkham R, Geltner D (1995) Price discovery in American and British property markets. Real Estate Economics 23:21–44CrossRef
go back to reference Bernanke B, Boivin J, Eliasz P (2005) Measuring the effects of monetary policy: A Factor-Augmented Vector Autoregressive (FAVAR) approach. Quart J Econ 120:387–422 Bernanke B, Boivin J, Eliasz P (2005) Measuring the effects of monetary policy: A Factor-Augmented Vector Autoregressive (FAVAR) approach. Quart J Econ 120:387–422
go back to reference Black SW (1978) Policy responses to the major disturbances in the 1970’s and their Transmission through International Goods and Capital Markets. Springer 114:614–641 Black SW (1978) Policy responses to the major disturbances in the 1970’s and their Transmission through International Goods and Capital Markets. Springer 114:614–641
go back to reference Bonello FJ, Swartz TR (1978) Alternative directions in economic policy. University of Notre Dame Press, 183 Bonello FJ, Swartz TR (1978) Alternative directions in economic policy. University of Notre Dame Press, 183
go back to reference Borio C, Filardo A (2007) Globalisation and inflation: new cross-country evidence on the global determinants of domestic inflation. BIS Working Papers No 227 Borio C, Filardo A (2007) Globalisation and inflation: new cross-country evidence on the global determinants of domestic inflation. BIS Working Papers No 227
go back to reference Bruno M (1978) Exchange rate, import costs and wage price dynamics. J Polit Econ 86:379–403CrossRef Bruno M (1978) Exchange rate, import costs and wage price dynamics. J Polit Econ 86:379–403CrossRef
go back to reference Bundick B, Smith AL (2020) Did the Federal reserve break the Phillips Curve? Theory and evidence of anchoring inflation expectations. Federal Reserve Bank of Kansas City, Research Working Paper Bundick B, Smith AL (2020) Did the Federal reserve break the Phillips Curve? Theory and evidence of anchoring inflation expectations. Federal Reserve Bank of Kansas City, Research Working Paper
go back to reference Cebula RJ, Frewer M (1980) Oil imports and inflation: An empirical international analysis of the ‘imported inflation thesis. Kyklos 33:615–622CrossRef Cebula RJ, Frewer M (1980) Oil imports and inflation: An empirical international analysis of the ‘imported inflation thesis. Kyklos 33:615–622CrossRef
go back to reference Ciccarelli M, Mojon B (2010) Global inflation. Rev Econ Stat 92(3):524–535CrossRef Ciccarelli M, Mojon B (2010) Global inflation. Rev Econ Stat 92(3):524–535CrossRef
go back to reference Clapp J, Giaccotto C (2002) Evaluating house price forecasts. Journal of Real Estate Research 24:1–26CrossRef Clapp J, Giaccotto C (2002) Evaluating house price forecasts. Journal of Real Estate Research 24:1–26CrossRef
go back to reference Clarida R, Galí J, Gertler M (2002) A simple framework for international monetary policy analysis. J Monet Econ 49(5):879–904CrossRef Clarida R, Galí J, Gertler M (2002) A simple framework for international monetary policy analysis. J Monet Econ 49(5):879–904CrossRef
go back to reference Clark P, Laxton D, Rose D (1996) Asymmetry in the U.S. Output-Inflation Nexus. International Monetary Fund Staff Paper 43(1):216–251CrossRef Clark P, Laxton D, Rose D (1996) Asymmetry in the U.S. Output-Inflation Nexus. International Monetary Fund Staff Paper 43(1):216–251CrossRef
go back to reference Coibion O, Gorodnichenko Y (2015) Is the Phillips curve alive and well after all? Inflation expectations and the missing disinflation. Am Econ J Macroecon 7(1):197–232CrossRef Coibion O, Gorodnichenko Y (2015) Is the Phillips curve alive and well after all? Inflation expectations and the missing disinflation. Am Econ J Macroecon 7(1):197–232CrossRef
go back to reference Davis JS (2012) Inflation expectations have become more anchored over time. Fed Reserv Bank Dallas Econ Lett 7:1–4 Davis JS (2012) Inflation expectations have become more anchored over time. Fed Reserv Bank Dallas Econ Lett 7:1–4
go back to reference Davis JS (2014) Inflation targeting and the anchoring of inflation expectations: cross-country evidence from consensus forecasts. Federal Reserve Bank of Dallas Working Paper Davis JS (2014) Inflation targeting and the anchoring of inflation expectations: cross-country evidence from consensus forecasts. Federal Reserve Bank of Dallas Working Paper
go back to reference Duncan R, Martínez-garcía E (2015) Forecasting Local Inflation with Global Inflation: When Economic Theory Meets the Facts, Federal Reserve Bank of Dallas Globalization and Monetary Policy Institute, Working Paper No. 235 Duncan R, Martínez-garcía E (2015) Forecasting Local Inflation with Global Inflation: When Economic Theory Meets the Facts, Federal Reserve Bank of Dallas Globalization and Monetary Policy Institute, Working Paper No. 235
go back to reference Forbes KJ (2019) Has globalization changed the inflation process? Monetary and Economic Department, BIS Working Paper No 791 Forbes KJ (2019) Has globalization changed the inflation process? Monetary and Economic Department, BIS Working Paper No 791
go back to reference Friedman M (1968) The role of monetary policy. Am Econ Rev 58:1–17 Friedman M (1968) The role of monetary policy. Am Econ Rev 58:1–17
go back to reference Frisch H (1977) Inflation theory 1963–1975: A second generation survey. J Econ Lit 15:1289–1317 Frisch H (1977) Inflation theory 1963–1975: A second generation survey. J Econ Lit 15:1289–1317
go back to reference Gupta R, Olson E, Wohar ME (2017) Forecasting key US macroeconomic variables with a Factor-Augmented Qual VAR. J Forecast 36:640–650CrossRef Gupta R, Olson E, Wohar ME (2017) Forecasting key US macroeconomic variables with a Factor-Augmented Qual VAR. J Forecast 36:640–650CrossRef
go back to reference Gurkaynak R, Levin A, Swanson E (2010) Targeting anchor long-run inflation expectations? Evidence from long-term bond yields in the US, UK, and Sweden. J Eur Econ Assoc 8:1208–1242 Gurkaynak R, Levin A, Swanson E (2010) Targeting anchor long-run inflation expectations? Evidence from long-term bond yields in the US, UK, and Sweden. J Eur Econ Assoc 8:1208–1242
go back to reference Hasbrouck J (1995) One security, many markets: determining the contributions to price discovery. J Financ 50:1175–1199CrossRef Hasbrouck J (1995) One security, many markets: determining the contributions to price discovery. J Financ 50:1175–1199CrossRef
go back to reference Inoue A, Jin L, Rossi B (2017) Rolling window selection for out-of-sample forecasting with time-varying parameters. J Econ 196(1):55–67CrossRef Inoue A, Jin L, Rossi B (2017) Rolling window selection for out-of-sample forecasting with time-varying parameters. J Econ 196(1):55–67CrossRef
go back to reference Jašová M, Moessner R, Takáts E (2018) Domestic and global output gaps as inflation drivers: What does the Phillips curve tell? Bank for International Settlements, Working Paper No 748 Jašová M, Moessner R, Takáts E (2018) Domestic and global output gaps as inflation drivers: What does the Phillips curve tell? Bank for International Settlements, Working Paper No 748
go back to reference Johansen S (1988) Statistical analysis of cointegrating vector. J Econ Dyn Control 12:231–254CrossRef Johansen S (1988) Statistical analysis of cointegrating vector. J Econ Dyn Control 12:231–254CrossRef
go back to reference Johansen S, Juselius K (1990) Maximum likelihood estimation and inference on cointegration with application to demand of money. Oxford Bull Econ Stat 52:69–210 Johansen S, Juselius K (1990) Maximum likelihood estimation and inference on cointegration with application to demand of money. Oxford Bull Econ Stat 52:69–210
go back to reference Jorgensen P, Lansing K (2019) Anchored inflation expectations and the flatter Phillips curve. Federal Reserve Bank of San Francisco, Working Paper Series 27 Jorgensen P, Lansing K (2019) Anchored inflation expectations and the flatter Phillips curve. Federal Reserve Bank of San Francisco, Working Paper Series 27
go back to reference Juselius K (2006) The cointegrated VAR model: Methodology and applications: Advanced texts in econometrics. Oxford Juselius K (2006) The cointegrated VAR model: Methodology and applications: Advanced texts in econometrics. Oxford
go back to reference Laubach T, Williams JC (2003) Measuring the real rate of interest. Rev Econ Stat 85:1063–1070CrossRef Laubach T, Williams JC (2003) Measuring the real rate of interest. Rev Econ Stat 85:1063–1070CrossRef
go back to reference Martínez-García E, Wynne MA (2010) The global slack hypothesis. Federal Reserve Bank of Dallas Staff Papers, 10, September Martínez-García E, Wynne MA (2010) The global slack hypothesis. Federal Reserve Bank of Dallas Staff Papers, 10, September
go back to reference Martínez-García E, Wynne MA (2013) Global slack as a determinant of U.S. inflation. In A. Filardo and A. Mehrotra (Eds.), Globalisation and Inflation Dynamics in Asia and the Pacific, Volume BIS Papers,70, 93–98. Bank for International Settlements Martínez-García E, Wynne MA (2013) Global slack as a determinant of U.S. inflation. In A. Filardo and A. Mehrotra (Eds.), Globalisation and Inflation Dynamics in Asia and the Pacific, Volume BIS Papers,70, 93–98. Bank for International Settlements
go back to reference Martínez-García E, Wynne MA (2014) Assessing Bayesian model comparison in small samples. Adv Econ 34:71–115 Martínez-García E, Wynne MA (2014) Assessing Bayesian model comparison in small samples. Adv Econ 34:71–115
go back to reference Newey W, West K (1987) A simple positive-definite Heteroskedasticity and Autocorrelation Consistent Covariance Matrix. Econometrica 55:703–708CrossRef Newey W, West K (1987) A simple positive-definite Heteroskedasticity and Autocorrelation Consistent Covariance Matrix. Econometrica 55:703–708CrossRef
go back to reference Obstfeld M (2020) Global dimension of US monetary policy. Int J Cent Bank 16(1):73–132 (Special Issue) Obstfeld M (2020) Global dimension of US monetary policy. Int J Cent Bank 16(1):73–132 (Special Issue)
go back to reference Sbordone AM (2009) Globalization and inflation dynamics: The impact of increased competition. International dimensions of monetary policy. University of Chicago Press, Chicago Sbordone AM (2009) Globalization and inflation dynamics: The impact of increased competition. International dimensions of monetary policy. University of Chicago Press, Chicago
go back to reference Stock JH, Watson MW (2010) Modeling inflation after the crisis. National Bureau of Economic Research, Working Papers: 16488 Stock JH, Watson MW (2010) Modeling inflation after the crisis. National Bureau of Economic Research, Working Papers: 16488
go back to reference Xu Q, Niu X, Jiang C, Huang X (2015) The Phillips curve in the US: A nonlinear quantile regression approach. Econ Model 49(C):186–197CrossRef Xu Q, Niu X, Jiang C, Huang X (2015) The Phillips curve in the US: A nonlinear quantile regression approach. Econ Model 49(C):186–197CrossRef
Metadata
Title
The impact of global economies on US inflation: A test of the Phillips curve
Authors
Hany Guirguis
Vaneesha Boney Dutra
Zoe McGreevy
Publication date
02-06-2022
Publisher
Springer US
Published in
Journal of Economics and Finance / Issue 3/2022
Print ISSN: 1055-0925
Electronic ISSN: 1938-9744
DOI
https://doi.org/10.1007/s12197-022-09583-x

Other articles of this Issue 3/2022

Journal of Economics and Finance 3/2022 Go to the issue