Abstract

In a globalised world, domestic inflation in a given country may be becoming less responsive to domestic economic activity, while being increasingly determined by international conditions. Consequently, understanding the international sources of vulnerability of domestic in inflation is turning fundamental for policy makers. In this paper, we propose the construction of Inflation-at-risk and Deflation-at-risk measures of vulnerability obtained using factor-augmented quantile regressions estimated with international factors extracted from a multi-level Dynamic Factor Model (ML-DFM) with not only global factors but also factors corresponding to overlapping blocks of variables. In particular, we consider blocks of countries grouped either in a given geographical region or according to their economic development level. The proposed methodology is implemented to in inflations observed monthly over 115 countries. We conclude that international factors are relevant to explain the right tail of the distribution of inflation in a large number of countries, mainly in those classifed as developed. Therefore, in these countries, international factors are more relevant for the vulnerability related to high inflation than for average or low inflation. As a consequence, it seems important that central banks in developed countries coordinate their strategies to control the risk of high domestic inflation. However, inflations of developing low-income countries are hardly affected by international conditions. The results for middle-income countries are mixed. Finally, based on a rolling-window out-of-sample forecasting exercise, we show that the pre- dictive power of international factors has increased in the most recent years of high inflation.