International Comovements and Persistence in Irish Inflation: A Nonlinear Approach

This paper studies Ireland’s idiosyncratic inflation dynamics. We find that Irish inflation is highly susceptible to trends in international inflation. Our results indicate that international inflation’s gravitational pull strengthens over time, particularly in the decade leading up to the Global Financial Crisis, after which we see some signs of waning in inflation comovements. The results also suggest that goods are more responsible for higher speeds of convergence towards international inflation than services, which tend to exert more downward pressures. Adjustments in deviations from international inflation are found to be highly nonlinear. While shock persistence for moderate to large inflation gaps is negligible, half-lives are in excess of a year for small deviations from international inflation. We find that factors such as economic size and openness attenuate inflation gaps by enhancing comovements with international inflation. While the impact on idiosyncratic inflation inertia depends on the absolute size of the inflation deviation, it also relies on how covariates influence market frictions and thus the rate of adjustment for a given inflation gap. This implies that, in the case of opposing forces, the net effect hinges on the stronger of the two channels.