Drivers and spillover effects of inflation: The United States, the euro area, and the United Kingdom☆

Stephen G. Hall, George S. Tavlas, Yongli Wang

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Abstract

We investigate the drivers of the recent inflation in three currency areas: the United States, the euro area, and the United Kingdom. To do so, we use a VAR set-up to examine the nature of the shocks that underpinned the recent inflation. We apply-two methods to calculate shocks – the standard Cholesky decomposition and a new method that captures more realistic shocks by solving the VAR backwards. We also use spatial modelling to investigate cross-country inflation spillovers. We find the inflationary shocks in the United States are transmitted to the euro area and the United Kingdom in a powerful and consistent way. The euro area transmits inflation to the other regions but to a lesser extent, while the inflation in the United Kingdom has little effect on the other two regions.
Original languageEnglish
Article number102776
Number of pages31
JournalJournal of International Money and Finance
Volume131
Early online date22 Nov 2022
DOIs
Publication statusPublished - 1 Mar 2023

Keywords

  • Inflation
  • VAR analysis
  • Impulse responses
  • Spatial spillovers

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