Scandinavian Working Papers in Economics

Working Papers,
Copenhagen Business School, Department of Economics

No 8-2021: How Local is the Local Inflation Factor? Evidence from Emerging European Countries

Oguzhan Cepni () and Michael P. Clements ()
Additional contact information
Oguzhan Cepni: Department of Economics, Copenhagen Business School, Postal: Copenhagen Business School, Department of Economics, Porcelaenshaven 16 A. 1. floor, DK-2000 Frederiksberg, Denmark
Michael P. Clements: ICMA Centre, Henley Business School, University of Reading, Postal: Reading RG6 6BA, United Kingdom

Abstract: We consider whether inflation is a ‘global phenomenon’ for European emerging market economies, as has been claimed for advanced or high-income countries. We find that a global inflation factor accounts for more than a half of the variance in the national inflation rates, and show that forecasting models of national headline inflation rates that include global inflation factors generally produce more accurate path forecasts than Phillips Curve-type models, and models with local inflation factors. Our results are qualitatively unaffected by allowing for sparsity and non-linearity in the factor forecasting models.

Keywords: Global inflation; Common factors; Forecasting; Variable selection

JEL-codes: E31; E52; F42; F62

61 pages, March 18, 2021

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