Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/225227 
Authors: 
Year of Publication: 
2020
Citation: 
[Journal:] KDI Journal of Economic Policy [ISSN:] 2586-4130 [Volume:] 42 [Issue:] 2 [Publisher:] Korea Development Institute (KDI) [Place:] Sejong [Year:] 2020 [Pages:] 57-84
Publisher: 
Korea Development Institute (KDI), Sejong
Abstract: 
This study analyzes global inflation synchronization and derives policy implications for the Korean economy. Unlike previous studies that assume a single global inflation factor, this study investigates if inflation in Korea can be explained further by other global inflation factors. Our principal component analysis provides three principal components for global inflation that are linked to the Korea inflation rate - the first component is closely related to OECD inflation, and the second and third components reflect China's inflation. This study empirically demonstrates via in-sample fitting and out-of-sample forecasting that the three principal components of global inflation play a significant role in explaining and predicting Korean inflation in the short-term, while their role is limited in the mid-term. Domestic macroeconomic variables are found to be more important for the mid-term movements of the Korean inflation rate. The empirical results here suggest that the Bank of Korea should focus more on domestic economic conditions than on global inflation when implementing monetary policy because global factors are likely to be already reflected in domestic macro-variables in the mid-term.
Subjects: 
Inflation Rates
Monetary Policy
Forecasting
Principal Component Model
LASSO
JEL: 
E31
E37
E5
Persistent Identifier of the first edition: 
Creative Commons License: 
cc-by-sa Logo
Document Type: 
Article

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