Impact of domestic unemployment gap and global commodity prices on inflation and inflation expectations

Abstract

Motivated by the changes in the dynamics of inflation and its expectations across the advanced economies, this dissertation consists of three essays: (i) the reduced sensitivity of domestic inflation to domestic unemployment gap and (ii) the comovement of foreign inflation and domestic inflation and (iii) the effect of global commodity prices on inflation expectations. In Chapter 2, we re-examine flattening of the Phillips curve for five advanced economies Australia, Canada, the euro area, the UK and the US over the period of 1971(Q1) 2018(Q4) newlineusing a time-varying parameter vector auto-regression. We contribute to the literature by conducting a comparative study and allowing for meaningful comparison of results among five advanced economies. We record heterogeneity in the results across economies and over time. We find that the Phillips curve has flattened over time for all the economies excluding the euro area, and is statistically significant over the entire sample period. The sensitivity of the inflation to the domestic unemployment gap in the post-crisis period is decreasing for Australia and the US, constant for Canada and the euro area and for the UK. We also examine whether the difference in the level of sensitivity between the pre-crisis period and post-crisis period is statistically significant. We find that the level of sensitivity in the post-crisis period is not newlinedifferent (statistically) from the slope in the pre-crisis period for Canada, the UK and the US, whereas it is different (statistically) for Australia. This implies that the relationship between newlineinflation and unemployment gap has changed for Australia, while the change in the relationship between inflation and demand forces for US and UK is temporary and can be attributed to the energy prices. Chapter 3 investigates the co-movement of inflation across advanced economies. Inflation has been very low, stable, and highly synchronized in most countries since the late 1990s. We study the comovement in headline iSimilarly,