Inflation Co-Movement: New Insights From Quantile Factor Model

Abstract

The growing empirical literature documents evidence on increasing global inflation co-movement across countries over time; however, little is known about the quantile co-movement structure of inflation. By introducing quantile factor model for a global sample of 151 countries from 1970 to 2023, this study provides new insights with respect to inflation co-movement. The quantile factor analysis sheds light on that (i) global inflation has a quantile-dependent factor structure, with different behavior in low, mild/stable, and high inflation periods; (ii) inflation shows an asymmetric co-movement pattern, with a decreasing degree in low and high inflation periods in comparison with stable inflation period; (iii) while interest rate and economic activity are the underlying observables for the latent quantile factors in low and stable inflation periods, commodity prices also become an underlying observable in high inflation period; and finally (iv) using quantile factors is nontrivial in improving density forecast of inflation in both developed and emerging markets.