Global Factors and Trend Inflation

We develop a model to empirically study the influence of global factors in driving trend inflation and the inflation gap. We apply our model to five established inflation targeters and a group of heterogeneous Asian economies. Our results suggest that while global factors can have a sizeable influence on the inflation gap, they play only a marginal role in driving trend inflation. Much of the influence of global factors in the inflation gap may be reflecting commodity price shocks. We also find global factors have a greater influence on inflation, and especially trend inflation, for the group of Asian economies relative to the established inflation targeters. A possible interpretation is that inflation targeting may have reduced the influence of global factors on inflation, and especially so on trend inflation