Is Nature of Inflation Co-Movement Time-Varying? Insights From a Dynamic Factor Model

Abstract

The purpose of this study is to examine whether inflation co-movement has a time-varying behavior. We estimate a dynamic factor model with time-varying variances and obtain variance decomposition for G7 countries from 1970 to 2023. The results reveal that (i) inflation co-movement tends to change with global shocks, with a more synchronized pattern during global financial crisis and COVID-19; and (ii) it tends to cluster across countries after COVID-19, with an increase in US, Canada, and Japan and a decrease in European countries (France, Germany, Italy, and UK). These findings hence provide new insights on time-varying inflation co-movement.