On Inflation Dynamics: International Comovements, Nonlinearities, and Persistence

This paper examines the link between international inflation comovements, deviations from international inflation, and idiosyncratic inflation persistence. Our results indicate that stronger international comovements produce smaller, more persistent gaps between domestic and international inflation. We find that international inflation continues to exert a strong pull on domestic inflation despite notable fluctuations in international comovements. Detecting adjustment nonlinearities, we estimate the typical half-life of inflation shocks for relatively large, moderate, and small inflation deviations to be under 1 month, 2 months, and 18 months respectively. Geographic proximity, openness, exchange rate rigidity, international reserves, economic size, and uncertainty are found to be inversely related to the size of inflation gaps, due to their positive effects on international comovements. The impact on persistence, however, is ambiguous, as it is a function of
not just the inflation gap, but also the speed of adjustment for a given size of the deviation. As the latter component covaries positively with most drivers, the net impact on persistence ultimately depends on the channel that dominates in the sample.