International Inflation Spillovers: The Role of Different Shocks

How do international price fluctuations spill over to country-specific inflation? We show that accounting for the drivers of international inflation and their effects on overall economic conditions is crucial to getting a more thorough view of spillover effects. We find substantial heterogeneity in the magnitude of spillovers, depending on the shocks driving inflation abroad. While all identified shocks are inflationary, their effects on activity, interest rates, and exchange rates differ. Disaggregated price responses suggest that these general equilibrium effects are important. We show this by looking at spillovers to Switzerland using a structural dynamic factor model relating disaggregated prices to key macroeconomic factors.