Global or domestic? Which shocks drive inflation in European small open economies?

Aleksandra Hałka and Jacek Kotłowski

No 232, NBP Working Papers from Narodowy Bank Polski

Abstract: In the paper we investigate, which shocks drive inflation in small open economies. We proceed in two steps. First, we use the SVAR approach to identify the global shocks. In the second step we regress the disaggregated price indices for selected European economies - the Czech Republic, Poland and Sweden- on the global shocks controlling for the domestic variables. Our results show that in two out of three analyzed countries the fluctuations of inflation are to the largest extent determined by the cyclical movements of the domestic output gap with the commodity shock being also the important source of inflation variability while for the third country the contribution of the commodity shock dominates over the output gap in explaining inflation fluctuations. We find that the direct impact of the global demand shock on the price dynamics is negligible, while it affects the country’s inflation mainly through the domestic output gap. The role of the non-commodity global supply shock is less prominent, however, this shock, interpreted to some extent as a globalization shock, for most of the analyzed period lowers the prices of semi-durable and durable goods and therefore the inflation. Nonetheless, in the aftermath of the global financial crisis, this shock reversed what may be interpreted as a weakening of the globalization process.

Keywords: Inflation; monetary policy; globalization; disaggregated price indices; output gap; exchange rate pass-through; SVAR models. (search for similar items in EconPapers)
JEL-codes: C53 E31 E37 E52 (search for similar items in EconPapers)
Date: 2016
New Economics Papers: this item is included in nep-cba, nep-eec, nep-mac, nep-mon and nep-tra
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

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Journal Article: Global or Domestic? Which Shocks Drive Inflation in European Small Open Economies? (2017)
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Persistent link: https://EconPapers.repec.org/RePEc:nbp:nbpmis:232

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