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Patrick Blagrave
Co-movement (synchronicity) in inflation rates among a set of 13 emerging and developing countries in Asia is shown to be strongest for the food component, partly due to common rainfall shocks—a result which the paper terms the ‘monsoon effect.’ Economies with higher trade integration and co-movement in nominal effective exchange rates also experience greater food-inflation co-movement. By contrast, cross-country co-movement in core inflation is weak and the aforementioned determinants have little explanatory power, suggesting a prominent role for idiosyncratic domestic factors in driving core inflation. In the context of the growing literature on the globalization of inflation, these results suggest that common weather patterns are partly responsible for any role played by a so-called ‘global factor’ among inflation rates in emerging and developing economies, in Asia at least.
International Monetary Fund. Asia and Pacific Dept
This Selected Issues paper examines the degree to which inflation co-moves between India and a panel of countries in Asia. The paper shows that the considerable co-movement in headline inflation rates between India and Nepal is driven almost exclusively by food-inflation co-movement. By contrast, the role for inflation spillovers emanating from India in driving non-food inflation in Nepal appears limited. The implication is that Nepal should rely on domestic monetary policy rather than stable inflation in India to achieve stable domestic inflation. The main takeaway from the results is that food inflation co-movement between India and other countries is higher in cases where the co-movement in rainfall deviations from seasonal norms is highest. Since core inflation co-movement is weak, idiosyncratic domestic factors such as economic slack, exchange-rate movements, and differing degrees of passthrough from food- and energy-price shocks play an important role. This finding is critically important for monetary policy, especially since domestic policy is primarily effective only in controlling core inflation. Thus, domestic monetary policy needs to be calibrated to domestic inflationary pressures—Nepal cannot necessarily rely on stable inflation in India to achieve stable domestic inflation.
Patrick Blagrave

integration is weakened once the two outlying country pairs are removed (right-side plot, Figure 1 ). Figure 1. Relationship between headline inflation co-movement and trade integration Looking at food-inflation co-movement, Figure 2 shows a stronger relationship between trade integration and cross-country correlations-to the extent that there is any such relationship in headline inflation, this indicates that it may be driven by these food-inflation dynamics. Figure 2 could suggest that countries who import a larger amount of food from one another have

Patrick Blagrave

inflation co-movement and trade integration 3. Relationship between core inflation co-movement and trade integration 4. Relationship between food inflation co-movement and rainfall co-movement Tables 1. Food inflation co-movement regressions 2. Core inflation co-movement regressions 3. Food inflation co-movement, robustness checks 4. Core inflation co-movement, robustness checks References Appendix

International Monetary Fund. Asia and Pacific Dept

supporting analysis which underlies the policy recommendations in the staff report. The first chapter shows that the considerable co-movement in headline inflation rates between India and Nepal is driven almost exclusively by food-inflation co-movement. By contrast, the role for inflation spillovers emanating from India in driving non-food inflation in Nepal appears limited. The implication is that Nepal should rely on domestic monetary policy rather than stable inflation in India to achieve stable domestic inflation. The second chapter analyzes Nepal’s newly

International Monetary Fund. African Dept.

Nigerian inflation. Correlation between food prices is even stronger, pointing to the key role of food prices in inflation co-movements ( Table 2.6 ). Table 2.6. Nigeria and Neighboring Countries’ CPI Inflation co-movement of Nigeria with its neighbors, 1990:Q1–2011:Q4 Food inflation co-movement of Nigeria with its neighbors, 200X 1 :Q1–2011:Q4 t-1 t t+1 t-1 t t+1 Benin 0.150 0.2 -0.065 Benin 0.176 -0.2 0.388 Burkina Faso 0.314 0.5 -0.042 Burkina Faso 0.254 0.3 0.212 Cameroon -0