Inflation in Low-Income Countries

This paper studies the effects of global and domestic inflation shocks on core price inflation in 105 countries between 1970 and 2016, by using a heterogeneous panel vector-autoregressive model. The methodology allows accounting for differences acr...

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Bibliographic Details
Main Authors: Ha, Jongrim, Ivanova, Anna, Montiel, Peter, Pedroni, Peter
Format: Working Paper
Language:English
Published: World Bank, Washington, DC 2019
Subjects:
Online Access:http://documents.worldbank.org/curated/en/410071562700985189/Inflation-in-Low-Income-Countries
http://hdl.handle.net/10986/32054
Description
Summary:This paper studies the effects of global and domestic inflation shocks on core price inflation in 105 countries between 1970 and 2016, by using a heterogeneous panel vector-autoregressive model. The methodology allows accounting for differences across groups of countries (advanced economies, emerging markets and developing economies, and low-income countries) and across groups with different country characteristics (such as foreign exchange and monetary policy regimes). The empirical results indicate that most of the variation in inflation among low-income countries over the past decades is accounted for by external shocks. More than half of the variation in core inflation rates among low-income countries is due to global core price shocks, compared with one-eighth in advanced economies. Global food and energy price shocks account for another 13 percent of core inflation variation in low-income countries -- half more than in advanced economies and one-fifth more than in emerging markets and developing economies. This points to challenges in anchoring domestic inflation expectations, which have been most evident among low -- income countries with floating exchange rates, especially in cases where central bank independence has been weak.