International Inflation Synchronization and Implications
This study analyzes global inflation synchronization and derives policy implications for the Korean economy. Unlike previous studies that assume a single global inflation factor, this study investigates if inflation in Korea can be explained further by other global inflation factors. Our principal c...
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| Format: | Article |
| Language: | English |
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Korea Development Institute
2020-05-01
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| Series: | KDI Journal of Economic Policy |
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| Online Access: | https://doi.org/10.23895/kdijep.2020.42.2.57 |
| _version_ | 1818504606935678976 |
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| author | SORA CHON |
| author_facet | SORA CHON |
| author_sort | SORA CHON |
| collection | DOAJ |
| description | This study analyzes global inflation synchronization and derives policy implications for the Korean economy. Unlike previous studies that assume a single global inflation factor, this study investigates if inflation in Korea can be explained further by other global inflation factors. Our principal component analysis provides three principal components for global inflation that are linked to the Korea inflation rate ― the first component is closely related to OECD inflation, and the second and third components reflect China’s inflation. This study empirically demonstrates via in-sample fitting and out-of-sample forecasting that the three principal components of global inflation play a significant role in explaining and predicting Korean inflation in the short-term, while their role is limited in the mid-term. Domestic macroeconomic variables are found to be more important for the mid-term movements of the Korean inflation rate. The empirical results here suggest that the Bank of Korea should focus more on domestic economic conditions than on global inflation when implementing monetary policy because global factors are likely to be already reflected in domestic macro-variables in the mid-term. |
| first_indexed | 2024-12-10T21:39:23Z |
| format | Article |
| id | doaj.art-bc0ae61946a24d0f885775c749ece255 |
| institution | Directory Open Access Journal |
| issn | 2586-2995 2586-4130 |
| language | English |
| last_indexed | 2024-12-10T21:39:23Z |
| publishDate | 2020-05-01 |
| publisher | Korea Development Institute |
| record_format | Article |
| series | KDI Journal of Economic Policy |
| spelling | doaj.art-bc0ae61946a24d0f885775c749ece2552022-12-22T01:32:34ZengKorea Development InstituteKDI Journal of Economic Policy2586-29952586-41302020-05-01422578410.23895/kdijep.2020.42.2.57International Inflation Synchronization and ImplicationsSORA CHON0Associate Fellow, Korea Development InstituteThis study analyzes global inflation synchronization and derives policy implications for the Korean economy. Unlike previous studies that assume a single global inflation factor, this study investigates if inflation in Korea can be explained further by other global inflation factors. Our principal component analysis provides three principal components for global inflation that are linked to the Korea inflation rate ― the first component is closely related to OECD inflation, and the second and third components reflect China’s inflation. This study empirically demonstrates via in-sample fitting and out-of-sample forecasting that the three principal components of global inflation play a significant role in explaining and predicting Korean inflation in the short-term, while their role is limited in the mid-term. Domestic macroeconomic variables are found to be more important for the mid-term movements of the Korean inflation rate. The empirical results here suggest that the Bank of Korea should focus more on domestic economic conditions than on global inflation when implementing monetary policy because global factors are likely to be already reflected in domestic macro-variables in the mid-term.https://doi.org/10.23895/kdijep.2020.42.2.57inflation ratesmonetary policyforecastingprincipal component modellasso |
| spellingShingle | SORA CHON International Inflation Synchronization and Implications KDI Journal of Economic Policy inflation rates monetary policy forecasting principal component model lasso |
| title | International Inflation Synchronization and Implications |
| title_full | International Inflation Synchronization and Implications |
| title_fullStr | International Inflation Synchronization and Implications |
| title_full_unstemmed | International Inflation Synchronization and Implications |
| title_short | International Inflation Synchronization and Implications |
| title_sort | international inflation synchronization and implications |
| topic | inflation rates monetary policy forecasting principal component model lasso |
| url | https://doi.org/10.23895/kdijep.2020.42.2.57 |
| work_keys_str_mv | AT sorachon internationalinflationsynchronizationandimplications |