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    PublicationOpen Access
    Inflation as a global phenomenon-nsome implications for inflation modelling and forecasting
    (Elsevier, 2018) Martinez-Garcia, Enrique; Department of Economics; Kabukçuoğlu, Ayşe; Faculty Member; Department of Economics; College of Administrative Sciences and Economics
    We model local inflation dynamics using global inflation and domestic slack motivated by a novel interpretation of the implications of the workhorse open-economy New Keynesian model. We evaluate the performance of inflation forecasts based on the single-equation forecasting specification implied by the model, exploiting the spatial pattern of international linkages underpinning global inflation. We find that incorporating cross-country interactions yields significantly more accurate forecasts of local inflation for a diverse group of 14 advanced countries (including the U.S.) than either a simple autoregressive model or a standard closed-economy Phillips curve-based forecasting model. We argue that modelling the temporal dimension—but not the cross-country spillovers—of inflation does limit a model’s explanatory power in-sample and its (pseudo) out-of-sample forecasting performance. Moreover, we also show that global inflation (without domestic slack) often contributes the most to achieve the gains on forecasting accuracy observed during our sample period (1984:Q1-2015:Q1)—this observation, according to theory, is crucially related to the flattening of the Phillips curve during this time period of increased globalization.