Does the U.S. Export Inflation? Evidence from the Dynamic Inflation Spillover between the U.S. And Eagles

Given inflation’s crucial role as a key economic barometer, our paper investigates the dynamic inflation spillover between the U.S. and the nine emerging and growth-leading economies (EAGLEs) between 1991M1 and 2020M2. Employing the recently developed time-varying parameter vector autoregression (TVP-VAR)-based connectedness approach, we find evidence of moderate inflation spillover across the sample countries at normal condition. Inflation spillover effects with the U.S. are more pronounced for the emerging markets with higher openness, those that are net oil-importing, and those with free-float exchange rate regimes. More importantly, the inflation spillover index among the system rises dramatically to over 70% under extremely inflationary conditions, implying a very high transmission of spiral inflation. Additionally, the time-varying analysis shows that the role of the U.S. in the inflation shock transmission with emerging countries varies between being a net inflation-exporter and inflation-importer over time. Finally, we find that the U.S. dollar, emerging markets’ economic policy uncertainty, and bilateral trade are key determinants of the inflation shock transmission among the system. Our findings support central banks’ actions in decreasing U.S. dollar reserves to safeguard their domestic currencies