Dynamics of Inflation in Emerging Markets: Is It Local or Global?

Abstract

This paper investigates inflation dynamics in emerging markets. We apply a multi-country model (GVAR) and a time-varying Granger causality test (TVGC) to examinethe drivers of inflation in Brazil, China, India, Indonesia, South Africa, and Türkiye overthe period 1980Q1-2022Q4. The aim is to ascertain whether these drivers are locallyor globally determined and vary over time. The GVAR model results indicate that localand global factors drive domestic inflation, collectively contributing to inflationary pres-sures in emerging countries. The TVGC results, on the other hand, provide strong evi-dence of the causality from local and global factors to domestic inflation. Local factorsappear to have a stronger influence than global ones, suggesting that local dynam-ics play a more significant role in explaining inflation in these countries. Consequently,globalization and economic/trade integration, seen as tools to suppress inflation, canturn into factors that cause inflation in the face of a supply shock such as the one causedby the pandemic.