Evolving International Inflation Dynamics: Evidence From A Time-Varying Dynamic Factor Model

Several industrialised countries have had a similar inflation experience in the past 30 years, with inflation high and volatile in the 1970s and the 1980s but low and stable in the most recent period. The authors explore the dynamics of inflation in these countries via a time-varying factor model. This statistical model is used to describe movements in inflation that are idiosyncratic or country specific and those that are common across countries. In addition, they investigate how co-movement has varied across the sample period. The results indicate that there has been a decline in the level, persistence and volatility of inflation across the sample of industrialised countries.