DOI: https://doi.org/10.52903/wp2022309
DRIVERS AND SPILLOVER EFFECTS OF INFLATION:
THE UNITED STATES,
THE EURO AREA,
AND THE UNITED KINGDOM
Stephen G. Hall
Leicester University, Bank of Greece, and Pretoria University
George S. Tavlas
Bank of Greece and the Hoover Institution, Stanford University
Yongli Wang
Birmingham University
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.
JEL-classifications: C52, C53
Keywords: Inflation, VAR analysis, impulse responses, spatial spillovers
Acknowledgements: We are grateful to the Editor-in-Chief, the Guest Editor, and a referee for very constructive comments. We are also grateful to Maria Monopoli for excellent research support. The views expressed in this paper are those of the authors and do not necessarily reflect those of the Bank of Greece. All remaining errors are ours.
Correspondence:
George Tavlas
Bank of Greece
21 E Venizelos Ave,
Athens, 10250, Greece
Tel. no. +30 210 320 2370
Email : gtavlas@bankofgreece.gr