International Aspects of Cost Push Inflation

Abstract

Recently two-digit inflation has started to dominate the economic scene in most countries. The fact that high inflation rates occur simultaneously in many countries reflects that economies are to a large extent intertwined. It is obvious then that ‘national’ inflation rates are due partly to inflation generated outside of national boundaries. International trade and money markets provide the most important channels through which inflation is being transmitted from one country to another. Small and open economies are now especially vulnerable in front of various inflation transmission mechanisms and face a difficult task in minimizing the foreign impact on domestic inflation.

The authors are research associate and professor of econometrics at C.O.R.E., Katholieke Universiteit te Leuven, respectively. We owe a very special debt to G.d’Alcantara who provided amply of his time and skill to set up the computer program needed for the simulation part of the study. V.Ginsburgh is thanked for his suggestions and for providing us some of the data. The study is financed by the Belgian Fonds voor Kollektief Fundamenteel Onderzoek (FKFO). Note that the work is done under the general supervision of the second author and J.Waelbroeck. Other recent research on inflation financed by the FKFO is [3], [4] and [5].