is it all about globalization?1.0 1.5 full period pre-crisis 2008-17 pp median errors over different...
TRANSCRIPT
Is It All About Globalization?
Kristin Forbes
MIT-Sloan School, NBER & CEPR
Brookings Conference: What’s (Not) Up for Inflation?
Washington, DC
October 3, 2019
Is it All About Globalization?
➢ Question has motivated recent research➢ Obstfeld (2019), Ha, Kose and Ohnsorge (2019)
➢ Forbes (2019): “Inflation Dynamics: Dead, Dormant or Determined Abroad”, Sept. BPEA
➢ The answer: Some of it (but not all) is about globalization➢ Particularly for CPI inflation & the cyclical component of
inflation over the last decade
➢ But less so for core and wage inflation
➢ Supported by results from 3 approaches (Forbes, 2019)➢ Principal components
➢ Augmented Phillips curve regressions
➢ Trend-cycle analysis
22
Principal Components of Different
Inflation Measures over Time
➢ ****
3
Augmented Phillips Curves
➢ Domestic variables only:𝜋𝑖𝑡 = 𝛽1𝜋𝑖𝑡
𝑒 + 𝛽2𝜋𝑖𝑡𝐿 + 𝛽3𝑆𝐿𝐴𝐶𝐾𝑖𝑡
𝐷 + 𝛼𝑖 +𝜖𝑖𝑡
➢ “Triangular”/Supply shock (Gordon….)+𝛾1𝐼𝑚𝑝𝑃𝑟𝑖𝑐𝑒𝑠𝑖𝑡
➢ Global Model+𝛾1𝑂𝑖𝑙𝑖𝑡
𝑊 + 𝛾2𝐶𝑜𝑚𝑚𝑖𝑡𝑊 + 𝛾3𝐸𝑅𝑖𝑡 + 𝛾4𝑆𝐿𝐴𝐶𝐾𝑡
𝑊 + 𝛾5𝐺𝑉𝐶𝑡𝑊
➢ Global Model with “flattening”+𝛽3(𝑆𝐿𝐴𝐶𝐾𝑖𝑡
𝐷 ∗ 𝐼𝑚𝑝𝑆ℎ𝑖𝑡)
4
Rolling Regressions: Median Errors
Actual vs. Predicted CPI Inflation
5
Median values of the absolute value of the difference between reported and predicted inflation based on
coefficients from 8-year rolling regressions of 3 models. Sample size is limited to countries/periods with
import price data to maintain a consistent sample.
0.0
1.0
2.0
3.0
20
03
200
5
20
07
20
09
20
11
20
13
201
5
pp
Global & DomesticDomestic OnlyDomestic + Import Prices
Rolling Regressions: Median Errors
Actual vs. Predicted Core & Wages
6
Median values of the absolute value of the difference between reported and predicted inflation based on
coefficients from 8-year rolling regressions of 3 models. Sample size is limited to countries/periods with
import price data to maintain a consistent sample.
0.0
1.0
2.0
3.0
200
3
20
05
20
07
20
09
20
11
20
13
201
5
pp
Core CPI InflationMedian Errors by Quarter
Global & Domestic
Domestic Only
Domestic + Import Prices
0.0
1.0
2.0
3.0
20
03
200
5
20
07
20
09
201
1
20
13
201
5
ppWage GrowthMedian Errors by Quarter
Global & Domestic
Domestic Only
Which Global Variables Matter? Estimated Contributions for US CPI
7
Exchange Rate Oil Prices
GVCs
Commodities
World Slack Domestic Slack
Final Thoughts
➢ Key results confirmed in trend-cycle analysis
➢ Globalization increasingly important for CPI (and cyclical) inflation ➢ But wage, core & underlying trend inflation
still largely a domestic process
➢ Key global effects for CPI inflation➢ Import exposure has contributed to some (but
not all) of “flattening”
➢ Other effects of globalization work through multiple channels—effects vary by time
8
EXTRA
9
Role of Commodities?
10
Role of Global Slack?
11
-3
-2
-1
0
1
2
3
4
1990 1993 1996 1999 2002 2005 2008 2011 2014 2017
%
Alternate Measures of Global Slack(as % of global GDP)
OECD Measure
IMF Measure
Principal Component
Role of Global Value Chains?
12
-4
-3
-2
-1
0
1
2
3
1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 2015 2017
Global Value Chains: Principal Component
Rolling Regressions: Median Errors
Actual vs. Predicted CPI Inflation
13
Median values of the absolute value of the difference between reported and predicted inflation based on
coefficients from 8-year rolling regressions of 3 models. Sample size is limited to countries/periods with
import price data to maintain a consistent sample.
0.0
0.5
1.0
1.5
Full Period Pre-Crisis 2008-17
pp
Median Errors Over Different Periods
Domestic Only
Domestic + Import Prices
Global & Domestic
0.0
0.5
1.0
1.5
2008-10 2011-14 2015-17
pp
Median Errors Over The Last Decade
Domestic Only
Domestic + Import Prices
Global & Domestic
Rolling Regressions: Median Errors
Actual vs. Predicted CPI Inflation
14
Median values of the absolute value of the difference between reported and predicted inflation based on
coefficients from 8-year rolling regressions of 3 models. Sample size is limited to countries/periods with
import price data to maintain a consistent sample.
0.0
0.5
1.0
1.5
Pre-Crisis 2008-17 2008-10 2011-14 2015-17
pp
Role of Commodity Prices Domestic OnlyDomestic + CommoditiesDomestic + Global except CommoditiesGlobal & Domestic