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Policy Study
International Inflation Synchronization and the Implications

October 31, 2018

  • Author CHON. Sora
  • Series No. Policy Study 2018-07
  • Language Korean
PDF
Policy Study
International Inflation Synchronization and the Implications

October 31, 2018

PDF
This study analyzes global inflation synchronization and examines the policy implications. Unlike past studies that assume there is only one factor behind global inflation, this study shows that about 63% of the inflation in major economies can be explained by three principal components―the first is closely related to the OECD average inflation while the second and third encompass data on China’s inflation. The OECD average inflation, which has been identified as a key factor of global inflation by preceding studies, was explained through the OECD money supply growth rate and trade (volume) growth rate to GDP.

In-sample and out-of-sample forecasting found that the principal components of global inflation play a significant role in explaining and projecting domestic inflation in the short-term. However, they play a limited role in the mid-term and rather, domestic macroeconomic variables are far more accurate. Accordingly, the recently forecasted global economic stagnation and ensuing concerns over low inflation are expected to have a limited impact on Korea’s inflation. Thus, it is recommended that the Bank of Korea, whose missions is to maintain stable domestic inflation, should focus more on domestic economic conditions than on global inflation when implementing monetary policy. That is not to say that the issue of global inflation should be ignored. In fact, the recommendation implies that domestic macroeconomic variables must be carefully considered as many global factors are already reflected in the variables. In addition, when projecting domestic inflation for the short-term, China’s inflation may become a good indicator.
 
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Office of Global Economy
Providing Economic Forecast and Macroeconomic Policy Direction, the Groundwork for a Brighter Future

The Department of Macroeconomics is conducting researches on the macro economy and macroeconomic policy, particularly focusing on suggesting the analysis of macroeconomic trends and current status of the economy at home and abroad, the economic forecast, and the policy direction of the macro economy. The Department is also in charge of establishing, sustaining and maintaining various econometric models, based on which it analyses policy effects and develops a long-term economic forecast.

Main Tasks
  • Economic trend analysis, short- and long-term forecast
  • Policy study on macroeconomic management
  • Basic structural analysis on macroeconomic areas
  • Maintenance of multi-sectoral dynamic macroeconomic model
Department of Macroeconomic Policy
  • LEE. Tae Suk

    Director, Division of Analysis and Evaluation

    82-044-550-4725
  • CHO, Byungkoo On leave

    Director and Vice President, Department of North Korean Economy

    82-044-550-4725
  • LEE, Jongkyu

    Fellow

    82-044-550-4725
  • WEE, Hyeseung Dispatched

    Research Associate

    82-044-550-4725
  • NAM, Jinwook On leave

    Specialist

    82-044-550-4725
  • KIM, Seulki

    Research Associate

    82-044-550-4725
  • CHUN, Eunkyung

    Research Associate

    82-044-550-4725
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