International inflation spillovers - the role of different shocks
Dr. Gregor Bäurle, Dr. Matthias Gubler and Diego R. Känzig
C11, C32, E31, E52, F62
international spillovers, inﬂation, monetary policy, Bayesian factor model, sign restrictions
We analyze how the transmission of international inﬂation spillovers depends on the nature of the underlying shocks that drive inﬂation abroad. We ﬁnd evidence for substantial heterogeneity in the magnitude of spillovers to domestic inﬂation related to the fundamental source of international price ﬂuctuations and the corresponding monetary policy reactions. Indeed, it turns out that the relative conduct of monetary policy varies depending on the source of these price ﬂuctuations, and so does the role of the exchange rate as a shock absorber. We show this by looking at international inﬂation spillovers to Switzerland through the lenses of a Bayesian structural dynamic factor model relating a large set of disaggregated prices to key macroeconomic factors. Being a small open economy with an independent monetary policy, Switzerland is a particularly suitable subject for studying the role of monetary policy in the transmission of foreign shocks. However, our results more broadly indicate that inﬂation spillovers need to be analyzed in a framework allowing for diﬀerent transmission channels.