## _wp12225

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### I. INTRODUCTION AND SUMMARY
- Research questions explored:
  - Whether countries with more independent central banks or inflation-targeting regimes experienced lower pass-throughs of commodity price shocks to domestic, including core inflation.
  - Role of openness of the economy and development of its financial sector in transmission of international price shocks.
  - Importance of pre-existing level of inflation in determining pass-through.
  - Extent to which a country’s governance framework beyond monetary regime matters in containing the impact on inflation.
  - Role of exchange-rate flexibility.
- Data and methods:
  - Comprehensive analysis using data for both advanced and developing economies over the period 2001–2011.
  - Approaches:
    - Assess speeds at which headline inflation reverts to core inflation and relate adjustment speeds to country characteristics and policy frameworks.
    - Estimate pass-throughs of international food and fuel prices to domestic inflation using country-by-country estimations and panel estimations of augmented Phillips curves, relating pass-throughs to country variables.
    - Study cross-country performance of headline and core inflation around the large 2008 commodity price shock.
  - Methodological innovation: explicitly examine role of dispersion of survey forecasts of inflation (as a measure of inflation uncertainty).

### Key findings (summary)
- Commodity price shocks have stronger effects on domestic inflation in developing countries than in advanced economies.
- Median long-term pass-through of a food price shock to domestic inflation is about four times larger for emerging and developing economies than for advanced economies.
- For the fuel price pass-through, the difference in median values between developing and advanced economies is less dramatic, but dispersion of pass-throughs for developing economies is significantly larger.
- Economies with high weight of food in the CPI basket and high oil intensities are more prone to stronger inflationary effects from food and fuel price shocks.
- Financial development and financial dollarization do not appear to significantly influence domestic inflation response to international price shocks (overall).
- No statistically significant relationship documented between labor market flexibility and pass-through of commodity price shocks to domestic inflation.
- Degree of trade openness is generally not related to size of pass-through; some indication that fuel price dynamics have a higher effect on domestic prices in more open developing economies.
- Clear evidence that inflationary impact of a commodity shock is higher for higher pre-existing inflation levels.
- Some indication that larger dispersion of inflation expectations is associated with higher inflationary pass-throughs; evidence is mixed.
- Inflation-targeting countries show only very modest evidence of faring better in inflation response to shocks; around the large 2008 food price shock, inflation targeters were not more able than other countries to prevent pass-through to core inflation when controlling for other factors.
- Countries with more independent central banks and higher governance scores — proxies for policy credibility — seem to have better contained the impact of commodity shocks.

### Does headline inflation revert to core? (2001–2010)
- Regression estimated:
  - π_headline,t−12 − π_core,t−12 = α + β(π_headline,t−1 − π_headline,t−12) + ε_t
  - If headline reverts to core, β expected negative.
- Results:
  - Estimated betas generally negative and statistically different from zero, indicating headline inflation reverting to core.
  - Speeds of reversion:
    - Advanced countries: mean=-1.1, median=-1.2 (faster reversion).
    - Emerging and developing countries: mean=-0.8, median=-0.9 (slower reversion).
- Correlations with country characteristics:
  - Larger food weight in CPI and higher exchange rate stability associated with lower reversion speed of headline to core.
  - No significant correlations for trade openness, financial dollarization, financial development, labor market flexibility, presence of IT regime, central bank autonomy, governance, and public debt in this analysis.

### Does core inflation revert to headline?
- Regression estimated:
  - π_core,t−12 − π_headline,t−12 = γ + δ(π_core,t−1 − π_core,t−12) + ε_t
  - If δ = 0, core does not revert to headline; δ = -1 implies full reversion.
- Findings:
  - For 25 out of 62 countries, the hypothesis that core inflation is not reverting to headline could not be rejected (δ close to 0 for these countries).
  - For many countries, evidence suggests presence of second-round effects where core inflation responds to headline shocks.

### Summary conclusion from reversion analysis
- During 2001–2010, headline inflation generally tended to revert to core, but evidence of second-round effects exists in both advanced and emerging economies, implying that commodity price shocks sometimes fed into core inflation and expectations.

### II. DATA
- Dataset comprises 31 advanced and 61 emerging and developing economies.
- Appendices referenced for details:
  - I. List of Countries Included
  - II. Data Sources

### III. PHILLIPS-CURVE METHODOLOGY (2001–2010)
- Country-by-country Phillips curves augmented by commodity prices, following Hooker (2002) and De Gregorio, Landerretche, and Neilson (2008).
- General specification:
  - π_it = α_i + Σ_{p=1}^{n} φ_{ip} π_{i,t-p} + Σ_{m=0}^{q} δ_{im} OutputGap_{i,t-m} + Σ_{p=0}^{q} θ_{ip} WorldFood_{t-p} + Σ_{p=0}^{q} u_{ip} WorldFuel_{t-p} + ε_it
- Estimation details:
  - Dependent variable: 12-month monthly CPI headline inflation.
  - Independent variables: lagged inflation, current and lagged output gap, international food and fuel prices.
  - Lag length chosen by minimizing the Akaike criterion.
  - Standard errors computed with the Newey-West estimator to account for serial correlation from overlapping observations.
- Pass-through calculations:
  - Long-term pass-throughs computed as sums of relevant coefficient series; pass-throughs represent the effect of a permanent change in oil and food price inflation on CPI inflation used as proxy for transmission in absence of cointegrating price-level relationships.

### Pass-through patterns: food and fuel
- Cross-country median difference reported as "0.2 percentage points, and about four times larger for emerging and developing economies."
- Dispersion:
  - Dispersion of the fuel price pass-through is significantly larger for developing economies; dispersion of food and fuel pass-throughs is similar when measured in domestic currency.
- Stationarity and interpretation:
  - Series treated as stationary on economic and statistical grounds; pass-throughs interpreted as effects of permanent changes in commodity price inflation on CPI inflation.

### Country factors correlated with pass-through (bivariate and country-by-country)
- Structural characteristics associated with larger sustained inflationary effects:
  - High weight of food in the CPI basket (correlations particularly strong for developing economies).
  - Higher oil (fuel) intensity of the economy.
  - Some indication that higher dollarization amplifies transmission of international food price shocks.
- Policy and institutional correlates:
  - Higher central bank autonomy and better governance associated with smaller impacts of commodity price shocks (correlation with central bank autonomy less apparent when shocks measured in foreign currency).
  - Little correlation found with inflation-targeting status in country-by-country bivariate analysis.
- Expectations and uncertainty:
  - Higher uncertainty about inflation (higher standard deviation of survey inflation expectations) associated with larger pass-through of international food price shocks; correlation weaker when food pass-throughs measured in foreign currency.
- Other associations:
  - Trade openness shows mixed evidence; bivariate plots suggest stronger correlations in developing economies but panel results are mixed.
  - Labor market flexibility: not significantly correlated.
  - Financial development (M3-to-GDP): associated with a slightly larger impact of commodity price shocks (counterintuitive; not shown in figures).
  - Public debt: higher public debt levels negatively associated with transmission size (coefficients significant; possible omitted variable bias).

### Panel estimations (augmented Phillips curves, sample 2001–2010)
- Estimation method:
  - Panel estimations with fixed effects; standard errors allowing heteroskedasticity, serial correlation and cross-country dependence using Driscoll and Kraay (1998) estimator.
  - Specification includes output gap and a proxy for marginal costs approximated by deviation of REER from trend.
- Key quantitative illustrations and relationships:
  - Output gap and marginal cost measures enter with expected signs and significant coefficients.
  - Fuel intensity:
    - A sustained increase of 10 percentage points in international fuel price inflation would translate into:
      - 0.4 percentage point increase in inflation in countries in the top 20th percentile for fuel intensity.
      - 0.01 percentage points in the bottom 20th percentile.
  - Food weight in CPI:
    - A 10 percentage point shock to international food prices is associated with:
      - 1.4 percentage point increase in inflation in countries in the top 20th percentile for food share in CPI.
      - 0.3 percentage points in the bottom 20th percentile.
  - Trade openness:
    - Overall, panel evidence does not show that more open economies systematically experience stronger effects from food and fuel price inflation.
  - Exchange-rate stability:
    - Evidence is not statistically significant.
  - High inflation environment:
    - Commodity price fluctuations have substantially larger pass-through when inflation already exceeds 10 percent.
    - In countries where inflation exceeds that threshold, a 10 percentage point rise in food inflation translates on average into a 1 percentage point higher CPI inflation than in countries with lower initial inflation rates.
  - Inflation targeting:
    - Statistically significant but minor effect: a 10 percentage point increase in international fuel price inflation is associated with only a 0.2 percentage point lower long-term inflationary impact for inflation targeters.
  - Central bank autonomy:
    - Sum of interaction coefficients negative (higher autonomy associated with lower inflationary impact) but not statistically significant in some specifications.
  - Governance:
    - Better governance frameworks associated with ability to contain inflationary impact of food price shocks.
    - Example: in response to a 10 percentage point increase in food inflation, a country at the bottom 20th percentile in governance rating will experience a 0.9 percentage point higher increase in inflation than a country in the top 20th percentile.
  - Dispersion of inflation expectations:
    - Effect ambiguous and not statistically significant overall (higher dispersion associated with bigger impact for food; reverse for fuel but magnitude small).
- Expectations data:
  - For the subset with survey expectations, expected inflation (mean) enters significantly but with low coefficient; dispersion (standard deviation) of forecasts interacted with shocks as proxy for inflation uncertainty.

### The 2008 commodity-price shock: event study (March 2008)
- Scope:
  - Compute changes in headline and core inflation six months before and after peak international food and fuel price inflation in March 2008; relate changes to country-level variables.
- Headline inflation (Sep 2007 to Sep 2008) findings:
  - Food share in CPI: countries with higher food shares confronted stronger headline inflation pressures.
  - Fuel-related proxies: not consistently correlated with headline inflation; energy intensity positively associated with headline inflation in some specifications.
  - Fuel importers: to some extent experienced weaker inflationary impact.
  - Pre-existing inflation environment:
    - Countries with higher initial inflation experienced much larger increases in CPI inflation.
    - Quantitative illustration: a country with headline inflation of 3 percent in early 2007 saw on average a 1.5–2.5 percentage point lower rise in inflation than a country with initial inflation of 8 percent.
  - Central bank autonomy:
    - Countries with more autonomous central banks saw a weaker increase in CPI inflation around the shock.
  - Policy reaction mattered:
    - Tighter monetary stance (measured by real short-term interest rates and change in nominal effective exchange rate) associated with lower hikes in inflation.
    - Tighter fiscal policy also associated with lower inflation hikes (though some policy variables not always statistically significant).
  - Dispersion of survey forecasts:
    - Standard deviation of Consensus Forecasts for 2008 positively correlated with inflation outcomes, but driven mainly by two outliers.
- Core inflation (Sep 2007 to Sep 2008) findings:
  - Central bank autonomy and governance:
    - Impact on core inflation was lower in developing countries with more autonomous central banks and to some extent with better governance.
    - Quantitative illustration: raising central bank autonomy from bottom to top fifth percentile associated with on average a 3.5 percentage point lower increase in core inflation.
  - Food share in CPI: positively correlated with impact on core inflation.
  - Fuel-related proxies: not correlated with transmission to core inflation.
  - Pre-existing inflation level: higher CPI inflation levels associated with stronger transmission to core inflation.
  - Policy variables: generally not significant except for degree of exchange rate movements—appreciations of nominal NEER associated with lower impact on core inflation.

### Conclusions and policy implications
- Structural vulnerability:
  - Countries with high food weight in CPI and high oil intensity are more prone to sustained inflationary effects from commodity price shocks; around 2008, net fuel importers faced somewhat lower pressures.
- Institutions and frameworks:
  - Better governance, greater central bank autonomy, and to a lesser extent the adoption of inflation targeting frameworks help anchor inflation expectations and reduce second-round effects; overall institutional confidence may matter more than formal IT status.
- Policy responses:
  - Around the 2008 shock, tighter monetary policy (real interest rate measures) helped contain inflationary impact; tighter fiscal policy also helped to a lesser degree.
- Role of initial inflation:
  - If inflation is already relatively high, commodity price shocks have a substantially higher pass-through to domestic inflation.
- Further research recommended:
  - More systematic examination of the formation of inflation expectations around commodity shocks and their role.
  - More microeconomic price-movement evidence around shocks could yield additional insights.

### Appendix I — structural notes, country coverage, and data sources (high-level)
- Country classification follows the IMF’s World Economic Outlook.
- Structural characteristics and variables discussed include:
  - Trade openness, net exporter/importer status, food and transport weights in the CPI basket, fuel intensity, degree of financial dollarization, financial development, labor market flexibility.
  - Monetary and exchange-rate regimes: central bank autonomy, inflation targeting status, exchange rate flexibility.
  - Possible presence of fiscal dominance proxied by public debt/GDP.
  - Governance and regulatory quality indices, index of monetary policy transparency.
  - Business cycle factor: output gap.
  - Policy reaction controls: nominal effective exchange rate changes, structural fiscal balance and changes, short-term interest rates and changes, growth of monetary aggregates.
- Dataset composition:
  - 31 advanced economies and 61 emerging and developing economies included.
- Data sources (select variables and units preserved exactly as in the source):
  - Headline inflation: Units: Percent; Description: CPI inflation; Source: Haver Analytics and WEO database.
  - Core inflation: Units: Percent; Description: Core CPI inflation; Source: Haver Analytics and WEO database.
  - Global food inflation: Units: Percent; Description: Yearly change in the index of food prices; Source: WEO database.
  - Global fuel inflation: Units: Percent; Description: Yearly change in the index of fuel prices; Source: WEO database.
  - Output gap: Units: Percent; Description: Based on HP filter; Source: WEO database, staff calculations.
  - REER Gap: Units: Percent; Description: REER deviation from trend, based on HP filter; Source: IMF, staff calculations.
  - Inflation expectations: Units: Percent; Description: Survey inflation expectations; Source: Consensus Forecasts, staff calculations.
  - Dispersion of inflation expectations: Units: Percent; Description: Standard deviation of survey inflation expectations; Source: Consensus Forecasts, staff calculations.
  - Trade openness: Units: Percent; Description: Calculated as sum of exports and imports divided by GDP; Source: Haver Analytics and WEO database.
  - Food share in CPI: Units: Percent; Description: Share of food items in CPI baskets; Source: Haver Analytics and WEO database.
  - Fuel Intensity: Units: Percent; Description: Calculated as annual oil consumption divided by GDP; Source: EIA, staff calculations.
  - Degree of financial dollarization: Units: Percent; Description: Foreign exchange deposits over total deposits; Source: Levy Yeyati (2006) (with 2010 database update) and IFS.
  - Financial development: Units: Percent; Description: Broad money as a share of GDP; Source: IFS, staff calculations.
  - Fiscal dominance: Units: Percent; Description: General government public debt in percent of GDP; Source: IMF.
  - Inflation Targeting regime: Units: Dummy; Description: 1 if the country’s monetary policy framework is inflation targeting; Source: Roger (2009).
  - CB autonomy index: Units: Index number; Description: 1 corresponds to the highest level of the Central bank autonomy; Source: Arnone et al (2007).
  - Turnover: Units: Number of central bank governors per year; Description: Turnover rate of central bank governors; Source: Crowe-Meade (2007).
  - Exchange rate stability: Units: Index number; Description: The exchange rate stability index ranges from 0 to 1; Source: AREAR 2011 (IMF).
  - Governance: Units: Index number; Description: A rating reflecting bureaucratic quality, corruption, democratic accountability and law and order; Source: International Country Risk Guide.
  - Regulatory quality: Units: Index number; Description: Captures perceptions of the ability of the government to formulate and implement sound policies and regulations that permit and promote private sector development; Source: World Bank.
  - Labor market flexibility: Units: Index number; Description: Captures different types of labor market regulations. Ranges from 0 to 10. (Higher values denote a more flexible labor market.); Source: 2011 Economic Freedom Dataset.

*Source: _wp12225 - References, https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/wp/2012/_wp12225.pdf*

### References .............................................................................................................

### _wp12225 - References

### I. INTRODUCTION AND SUMMARY
- Research questions explored:
  - Whether countries with more independent central banks or inflation-targeting regimes experienced lower pass-throughs of commodity price shocks to domestic, including core inflation.
  - Role of openness of the economy and development of its financial sector in transmission of international price shocks.
  - Importance of pre-existing level of inflation in determining pass-through.
  - Extent to which a country’s governance framework beyond monetary regime matters in containing the impact on inflation.
  - Role of exchange-rate flexibility.
- Data and methods:
  - Comprehensive analysis using data for both advanced and developing economies over the period 2001–2011.
  - Approaches: (i) assess speeds at which headline inflation reverts to core inflation and relate adjustment speeds to country characteristics and policy frameworks; (ii) estimate pass-throughs of international food and fuel prices to domestic inflation using country-by-country estimations and panel estimations of augmented Phillips curves, relating pass-throughs to country variables; (iii) study cross-country performance of headline and core inflation around the large 2008 commodity price shock.
  - Methodological innovation: explicitly examine role of dispersion of survey forecasts of inflation (as a measure of inflation uncertainty).
- Key findings:
  - Commodity price shocks have stronger effects on domestic inflation in developing countries than in advanced economies.
  - Median long-term pass-through of a food price shock to domestic inflation is about four times larger for emerging and developing economies than for advanced economies.
  - For the fuel price pass-through, difference in median values between developing and advanced economies is less dramatic, but dispersion of pass-throughs for developing economies is significantly larger.
  - Economies with high weight of food in the CPI basket and high oil intensities are more prone to stronger inflationary effects from food and fuel price shocks.
  - Financial development and financial dollarization do not appear to significantly influence domestic inflation response to international price shocks.
  - No statistically significant relationship documented between labor market flexibility and pass-through of commodity price shocks to domestic inflation.
  - Degree of trade openness is generally not related to size of pass-through; some indication that fuel price dynamics have a higher effect on domestic prices in more open developing economies.
  - Clear evidence that inflationary impact of a commodity shock is higher for higher pre-existing inflation levels.
  - Some indication that larger dispersion of inflation expectations is associated with higher inflationary pass-throughs; evidence is mixed.
  - Inflation-targeting countries show only very modest evidence of faring better in inflation response to shocks; around the large 2008 food price shock, inflation targeters were not more able than other countries to prevent pass-through to core inflation when controlling for other factors.
  - Countries with more independent central banks and higher governance scores — proxies for policy credibility — seem to have better contained the impact of commodity shocks.

### II. LITERATURE REVIEW
- Scope and approaches of prior studies vary significantly in scope, choice of control variables, and estimation techniques, yielding differing results.
- IMF World Economic Outlook (IMF, 2011):
  - Examines impact of commodity prices on inflation over 2000–2011.
  - Pass-through analysis based on country-by-country regressions of domestic food or transportation price inflation on international commodity inflation and lagged domestic food or transportation inflation.
  - Reports food price shocks tend to have larger effects on headline inflation in emerging and developing economies than in advanced economies.
  - Finds impact larger and longer lasting in economies with high food shares in consumption; food price shocks have larger effects on inflation expectations in many emerging and developing economies.
  - Does not systematically assess role of other country characteristics.
- Habermeier et al. (2009):
  - Covers data from 2007 through June 2008 using panel estimations across 50 countries.
  - Finds IT countries managed to counter inflation better; exchange rate policy, higher central bank independence and transparency associated with lower inflation; effect of monetary tightening limited.
- De Gregorio, Landerretche, and Neilson (2008):
  - Evidence of a decline in pass-through from oil price to general price level in recent decades.
  - Methodology: Phillips curve and rolling vector autoregression estimations across 34 countries.
  - Decline more pronounced in industrial than in emerging economies.
  - Factors: reduction in oil intensity, reduction in exchange rate pass-through, more favorable inflation environment, and current oil price shock due to strong world demand.
- Neely and Rapach (2011):
  - Dynamic latent factor model across 64 countries.
  - World and regional components account for 35 percent and 16 percent of annual inflation variability, respectively.
  - Openness to trade, institutional quality, financial development, real GDP per capita, average inflation, inflation volatility and central bank independence correlated with sensitivity to world factor.
- Zoli (2009):
  - Assesses role of international commodity prices, cyclical fluctuations, and convergence in inflation for 18 European emerging economies.
  - Uses country-specific VARs and panel estimates; finds international commodity price shocks have significant impact on domestic inflation with asymmetric responses for positive and negative shocks.
- Cecchetti and Moessner (2008):
  - For 19 countries, find core inflation has not tended to revert to headline in recent years, suggesting higher commodity prices have generally not spawned strong second-round effects on inflation (period: 1994 through August 2008).
- Chen (2009):
  - State space approach for 19 industrialized countries; estimates time-varying oil price pass-through coefficients.
  - Finds significant decline in average pass-through attributed to monetary policy changes, behavior of nominal exchange rates, and higher trade openness; did not find evidence that a lower inflation environment is associated with lower pass-through.
- Rigobón (2010):
  - Uses micro price data for 50 countries; finds heterogeneous country responses and sectoral differences to commodity shocks; sectoral characteristics drive a third of explained variation.
- Pedersen (2010):
  - Structural VAR models for 46 countries over 1999–2010.
  - Finds propagation effect of food price shocks generally larger than energy price shocks, with emerging economies more affected than advanced ones.

### III. DATA
- Dataset comprises 31 advanced and 61 emerging and developing economies.
- Appendices (listed in contents):
  - I. List of Countries Included
  - II. Data Sources

*Source: _wp12225 - References, https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/wp/2012/_wp12225.pdf*

### Appendix I).

### Appendix I)

### Structural characteristics
- Country classification follows the IMF’s World Economic Outlook.
- Variables included and rationale:
  - Trade openness: linked to long-run inflation (Romer (1993)); empirical evidence mixed (Terra (1998), Kim and Beladi (2005)).
  - Net exporters/importers of commodities: a commodity price increase generates a positive terms of trade shock for net exporters (increasing demand, prices, and the nominal exchange rate) and the opposite for net importers.
  - Food and transport weights in the CPI basket: higher weights mechanically imply a higher inflationary impact and likely larger second-round effects.
  - Fuel intensity: expected positive correlation with the impact of oil price increases on the general price level.
  - Degree of financial dollarization: high dollarization likely limits effectiveness of monetary policy and is associated with higher indexation.
  - Financial development: greater financial development may raise monetary policy effectiveness and help dampen inflationary pressures (evidence, however, is ambiguous).
  - Labor market flexibility: low flexibility associated with real wage rigidities; with rigidities, optimal monetary policy may accommodate inflation, implying higher inflation pressures where labor markets are less flexible.
- Note: The share of non-tradable goods and domestic fuel price data availability are limited and not included in the analysis (footnote 4 and 5).

### Monetary and exchange-rate regimes
- Central bank autonomy: greater autonomy associated with higher credibility and improved price stability.
- Inflation targeting (IT) regime: expected to anchor inflation expectations and reduce the domestic inflation response to external commodity price shocks.
- Exchange rate flexibility: for net commodity exporters, nominal appreciation is equilibrium—if not allowed, domestic price pressures rise; for net importers, a fixed nominal exchange rate makes necessary depreciation difficult but can dampen inflationary impact.
- The level of inflation: pass-through is likely higher in a high inflation environment; low and stable inflation should be associated with less persistent inflationary impact (Taylor (2000)).

### Possible presence of fiscal dominance
- Public debt/GDP: under fiscal dominance, monetary policy may struggle to achieve inflation objectives; fiscal variables tend to influence inflation expectations in emerging markets (Celasun, Gelos, and Prati (2004)).

### Governance
- Index of monetary policy transparency: greater transparency supports predictability, governance, accountability, anchors expectations, and prevents second-round effects.
- Index of governance and rule of law: higher values indicate greater accountability, transparency, public sector efficiency, and rule of law—encompassing institutional and policy credibility.
- Regulatory quality: similar arguments apply.

### Business cycle factors
- Output gap: included as a measure of excess demand in Phillips-curve analysis; a smaller output gap implies a larger inflationary impact of an external shock.

### Policy reactions (controlled for in some estimations)
- Nominal effective exchange rate changes.
- Structural fiscal balance and changes therein.
- Short-term interest rates and changes therein.
- Growth of monetary aggregates.
- Data availability differs across countries; see Appendix II for variable details.

### Does headline inflation revert to core (2001–2010)?
- Objective: assess whether headline inflation reverts to core and whether core reverts to headline using 12-month monthly CPI headline and core inflation for 2001–2010.
- Estimated regression for headline reverting to core:
  - π_headline,t−12 − π_core,t−12 = α + β(π_headline,t−1 − π_headline,t−12) + ε_t
  - If headline reverts to core, β expected negative.
- Results:
  - Estimated betas are generally negative and statistically different from zero, indicating headline inflation reverting to core.
  - Speeds of reversion:
    - Advanced countries: mean=-1.1, median=-1.2 (faster reversion).
    - Emerging and developing countries: mean=-0.8, median=-0.9 (slower reversion).
  - Comparison with 1990–2000: coefficients for advanced countries tended to become smaller in 2001–2010; data limitations prevent firm conclusions for developing economies.
- Correlations between reversion speed and country characteristics:
  - Some evidence that larger food weight in CPI and higher exchange rate stability are associated with lower reversion speed of headline to core.
  - No significant correlations found for trade openness, financial dollarization, financial development, labor market flexibility, presence of IT regime, central bank autonomy, governance, and public debt.
  - Results remained inconclusive when controlling for country development level and over shorter periods—possibly due to omitted variables.

### Does core inflation revert to headline?
- Estimated regression for core reverting to headline:
  - π_core,t−12 − π_headline,t−12 = γ + δ(π_core,t−1 − π_core,t−12) + ε_t
  - If δ = 0, core does not revert to headline; δ = -1 implies full reversion.
- Findings:
  - For 25 out of 62 countries, the hypothesis that core inflation is not reverting to headline could not be rejected (indicating δ close to 0 for these countries).
  - For many countries, evidence suggests the presence of second-round effects where core inflation does respond to headline shocks.

### Summary conclusion from reversion analysis
- During 2001–2010, headline inflation generally tended to revert to core, but evidence of second-round effects exists in both advanced and emerging economies, implying that commodity price shocks sometimes fed into core inflation and expectations.

### Phillips-curve estimations (2001–2010)
- Methodology:
  - Country-by-country Phillips curves augmented by commodity prices, following Hooker (2002) and De Gregorio, Landerretche, and Neilson (2008).
  - Dependent variable: 12-month monthly CPI headline inflation.
  - Independent variables: lagged inflation (inertia), current and lagged output gap, international food and fuel prices.
  - Lag length chosen by minimizing the Akaike criterion.
  - Standard errors computed with the Newey-West estimator to account for serial correlation from overlapping observations.
- General specification (as given):
  - π_it = α_i + Σ_{p=1}^{n} φ_{ip} π_{i,t-p} + Σ_{m=0}^{q} δ_{im} OutputGap_{i,t-m} + Σ_{p=0}^{q} θ_{ip} WorldFood_{t-p} + Σ_{p=0}^{q} u_{ip} WorldFuel_{t-p} + ε_it
- Pass-through calculations:
  - Long-term pass-throughs are computed as sums of relevant coefficient series (formulae provided in the source).
- Key empirical regularity:
  - Commodity price shocks have stronger effects on domestic inflation in developing countries than in advanced economies (consistent with IMF (2011)).
  - Example (text cut off in provided content): the median long-term pass-through of a 10 percentage point food price shock to domestic inflation for advanced economies is reported (full numeric value not included in the supplied excerpt).

*Appendix I). Source PDF: _wp12225 - Appendix I).*

### 0.2 percentage points, and about four times larger for emerging and developing economies.

### _wp12225 - 0.2 percentage points, and about four times larger for emerging and developing economies.

### Pass-through patterns: food and fuel
- Median pass-through differences:
  - Cross-country median difference reported as "0.2 percentage points, and about four times larger for emerging and developing economies."
- Dispersion:
  - Dispersion of the fuel price pass-through is significantly larger for developing economies; dispersion of food and fuel pass-throughs is similar when measured in domestic currency.
- Stationarity and interpretation:
  - Series treated as stationary on economic and statistical grounds.
  - Pass-throughs represent the effect of a permanent change in oil and food price inflation on CPI inflation and are used as a proxy for transmission in absence of cointegrating price-level relationships.

### Country factors correlated with pass-through (country-by-country and bivariate analysis)
- Structural characteristics associated with larger sustained inflationary effects:
  - High weight of food in the CPI basket (correlations particularly strong for developing economies).
  - Higher oil (fuel) intensity of the economy.
  - Some indication that higher dollarization amplifies transmission of international food price shocks.
- Policy and institutional correlates:
  - Higher central bank autonomy and better governance are associated with smaller impacts of commodity price shocks (correlation with central bank autonomy less apparent when shocks measured in foreign currency).
  - Little correlation found with inflation-targeting status in country-by-country bivariate analysis.
- Expectations and uncertainty:
  - Higher uncertainty about inflation (higher standard deviation of survey inflation expectations) is associated with larger pass-through of international food price shocks. Correlation weaker when food pass-throughs are measured in foreign currency.
- Other variables with limited or surprising associations:
  - Trade openness: correlations are particularly strong in bivariate plots for developing economies but panel results are mixed (see Panel estimations).
  - Labor market flexibility: not significantly correlated with inflation impact.
  - Financial development (M3-to-GDP): associated with a slightly larger impact of commodity price shocks (counterintuitive; not shown in figures).
  - Public debt: higher public debt levels are negatively associated with transmission size (coefficients significant; possible omitted variable bias).

### Panel estimations (augmented Phillips curves, sample 2001–2010)
- Method:
  - Panel estimations of augmented Phillips curves for period 2001–2010 with fixed effects; standard errors allowing heteroskedasticity, serial correlation and cross-country dependence using Driscoll and Kraay (1998) estimator.
  - Specification includes output gap and a proxy for marginal costs approximated by deviation of real effective exchange rates (REER) from trend.
- Key estimated relationships and quantitative illustrations:
  - Output gap and marginal cost measures enter with expected signs and significant coefficients.
  - Fuel intensity:
    - A sustained increase of 10 percentage points in international fuel price inflation would translate into:
      - 0.4 percentage point increase in inflation in countries in the top 20th percentile for fuel intensity.
      - 0.01 percentage points in the bottom 20th percentile.
  - Food weight in CPI:
    - A 10 percentage point shock to international food prices is associated with:
      - 1.4 percentage point increase in inflation in countries in the top 20th percentile for food share in CPI.
      - 0.3 percentage points in the bottom 20th percentile.
  - Trade openness:
    - Overall, the panel evidence does not show that more open economies systematically experience stronger effects from food and fuel price inflation.
  - Exchange-rate stability:
    - Evidence is not statistically significant.
  - High inflation environment:
    - Commodity price fluctuations have substantially larger pass-through when inflation already exceeds 10 percent.
    - In countries where inflation exceeds that threshold, a 10 percentage point rise in food inflation translates on average into a 1 percentage point higher CPI inflation than in countries with lower initial inflation rates.
  - Inflation targeting:
    - Statistically significant but minor effect: a 10 percentage point increase in international fuel price inflation is associated with only a 0.2 percentage point lower long-term inflationary impact for inflation targeters.
  - Central bank autonomy:
    - Sum of interaction coefficients negative (higher autonomy associated with lower inflationary impact) but not statistically significant in some specifications.
  - Governance:
    - Better governance frameworks associated with ability to contain inflationary impact of food price shocks.
    - Example: in response to a 10 percentage point increase in food inflation, a country at the bottom 20th percentile in governance rating will experience a 0.9 percentage point higher increase in inflation than a country in the top 20th percentile.
  - Dispersion of inflation expectations:
    - Effect ambiguous and not statistically significant overall (higher dispersion associated with bigger impact for food; reverse for fuel but magnitude small).
- Estimation additional notes:
  - For subset with survey expectations, expected inflation (mean) enters significantly but with low coefficient; dispersion (standard deviation) of forecasts interacted with shocks as proxy for inflation uncertainty.

### The 2008 commodity-price shock: event study (March 2008)
- Scope:
  - Compute changes in headline and core inflation six months before and after peak international food and fuel price inflation in March 2008; relate changes to country-level variables.
- Headline inflation (Sep 2007 to Sep 2008):
  - Food share in CPI: countries with higher food shares confronted stronger headline inflation pressures.
  - Fuel-related proxies: not consistently correlated with headline inflation; energy intensity positively associated with headline inflation in some specifications.
  - Fuel importers: to some extent experienced weaker inflationary impact.
  - Output gap and labor market flexibility: not significant determinants in these regressions.
  - Pre-existing inflation environment:
    - Countries with higher initial inflation experienced much larger increases in CPI inflation.
    - Quantitative illustration: a country with headline inflation of 3 percent in early 2007 saw on average a 1.5–2.5 percentage point lower rise in inflation than a country with initial inflation of 8 percent.
  - Central bank autonomy:
    - Countries with more autonomous central banks saw a weaker increase in CPI inflation around the shock.
    - No statistically significant difference between inflation targeting and non-inflation targeting economies in performance.
  - Policy reaction mattered:
    - Tighter monetary stance (measured by real short-term interest rates and change in nominal effective exchange rate) associated with lower hikes in inflation.
    - Tighter fiscal policy also associated with lower inflation hikes (though some policy variables not always statistically significant).
  - Dispersion of survey forecasts:
    - Standard deviation of Consensus Forecasts for 2008 positively correlated with inflation outcomes, but driven mainly by two outliers.
- Core inflation (Sep 2007 to Sep 2008):
  - Central bank autonomy and governance:
    - Impact on core inflation was lower in developing countries with more autonomous central banks and to some extent with better governance.
    - Quantitative illustration: raising central bank autonomy from bottom to top fifth percentile associated with on average a 3.5 percentage point lower increase in core inflation.
  - Food share in CPI: positively correlated with impact on core inflation.
  - Fuel-related proxies: not correlated with transmission to core inflation.
  - Pre-existing inflation level: higher CPI inflation levels associated with stronger transmission to core inflation.
  - Policy variables: generally not significant except for degree of exchange rate movements—appreciations of nominal NEER associated with lower impact on core inflation.

### Conclusions and policy implications
- Structural vulnerability:
  - Countries with high food weight in CPI and high oil intensity are more prone to sustained inflationary effects from commodity price shocks; around 2008, net fuel importers faced somewhat lower pressures.
- Institutions and frameworks:
  - Better governance, greater central bank autonomy, and to a lesser extent the adoption of inflation targeting frameworks help anchor inflation expectations and reduce second-round effects; overall institutional confidence may matter more than formal IT status.
- Policy responses:
  - Around the 2008 shock, tighter monetary policy (real interest rate measures) helped contain inflationary impact; tighter fiscal policy also helped to a lesser degree.
- Role of initial inflation:
  - If inflation is already relatively high, commodity price shocks have a substantially higher pass-through to domestic inflation.
- Further research recommended:
  - More systematic examination of the formation of inflation expectations around commodity shocks and their role.
  - More microeconomic price-movement evidence around shocks could yield additional insights.

*Source: IMF Working Paper content unit _wp12225 - 0.2 percentage points, and about four times larger for emerging and developing economies.*

### REFERENCES

### _wp12225 - REFERENCES

### References
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- Catao, Luis, and Roberto Chang, 2010, “World Food Prices and Monetary Policy,” NBER Working Paper 16563.
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- Cerisola, Martin and Gaston Gelos, 2009, “What Drives Inflation Expectations in Brazil? – An Empirical Analysis,” Applied Economics, May 2009.
- Chen, Shiu-Sheng, 2009, “Oil Price Pass-Through into Inflation,” Energy Economics, Vol. 31, pp. 126–33.
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- De Gregorio, José, Oscar Landerretche, and Christopher Neilson, 2007, “Another Pass-Through Bites the Dust? Oil Prices and Inflation,” Economía, Vol. 7, No. 2, pp. 155–208.
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- Hakura, Dalia, 2005, “Are Emerging Market Countries Learning to Float?,” IMF Working Paper (Washington: International Monetary Fund).
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- International Monetary Fund, 2008, “World Economic Outlook,” October (Washington: International Monetary Fund).
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### Appendix I. List of Countries Included

- Advanced economies
  - Austria
  - Belgium
  - Canada
  - Cyprus
  - Czech Republic
  - Denmark
  - Estonia
  - Finland
  - France
  - Germany
  - Greece
  - Hong Kong
  - Iceland
  - Ireland
  - Israel
  - Italy
  - Japan
  - Korea, South
  - Malta
  - Netherlands
  - New Zealand
  - Norway
  - Portugal
  - Singapore
  - Slovenia
  - Spain
  - Sweden
  - Switzerland
  - Taiwan
  - UK
  - USA

- Emerging and Developing Economies
  - Albania
  - Algeria
  - Argentina
  - Bahrain
  - Bangladesh
  - Bolivia
  - Botswana
  - Brazil
  - Bulgaria
  - Chile
  - China
  - Colombia
  - Costa Rica
  - Croatia
  - Dominican Republic
  - Ecuador
  - El Salvador
  - Georgia
  - Ghana
  - Guatemala
  - Honduras
  - Hungary
  - India
  - Indonesia
  - Iran
  - Jordan
  - Kazakhstan
  - Kuwait
  - Latvia
  - Lebanon
  - Lithuania
  - Macao
  - Macedonia
  - Malaysia
  - Mauritius
  - Mexico
  - Namibia
  - Nicaragua
  - Nigeria
  - Oman
  - Pakistan
  - Panama
  - Paraguay
  - Peru
  - Philippines
  - Poland
  - Romania
  - Russia
  - Saudi Arabia
  - South Africa
  - Sri Lanka
  - Thailand
  - Tunisia
  - Turkey
  - Uganda
  - Ukraine
  - United Arab Emirates
  - Uruguay
  - Venezuela
  - Vietnam

### Appendix II. Data Sources

- Variable: Headline inflation
  - Units: Percent
  - Description: CPI inflation
  - Source: Haver Analytics and WEO database

- Variable: Core inflation
  - Units: Percent
  - Description: Core CPI inflation
  - Source: Haver Analytics and WEO database

- Variable: Global food inflation
  - Units: Percent
  - Description: Yearly change in the index of food prices
  - Source: WEO database

- Variable: Global fuel inflation
  - Units: Percent
  - Description: Yearly change in the index of fuel prices
  - Source: WEO database

- Variable: Output gap
  - Units: Percent
  - Description: Based on HP filter
  - Source: WEO database, staff calculations

- Variable: REER Gap
  - Units: Percent
  - Description: REER deviation from trend, based on HP filter
  - Source: IMF, staff calculations

- Variable: Inflation expectations
  - Units: Percent
  - Description: Survey inflation expectations
  - Source: Consensus Forecasts, staff calculations

- Variable: Dispersion of inflation expectations
  - Units: Percent
  - Description: Standard deviation of survey inflation expectations
  - Source: Consensus Forecasts, staff calculations

- Variable: Trade openness
  - Units: Percent
  - Description: Calculated as sum of exports and imports divided by GDP
  - Source: Haver Analytics and WEO database

- Variable: Food share in CPI
  - Units: Percent
  - Description: Share of food items in CPI baskets
  - Source: Haver Analytics and WEO database

- Variable: Fuel Intensity
  - Units: Percent
  - Description: Calculated as annual oil consumption divided by GDP
  - Source: EIA, staff calsulations

- Variable: Degree of financial dollarization
  - Units: Percent
  - Description: Foreign exchange deposits over total deposits
  - Source: Levy Yeyati (2006) (with 2010 database update) and IFS

- Variable: Financial development
  - Units: Percent
  - Description: Broad money as a share of GDP
  - Source: IFS, staff calculations

- Variable: Fiscal dominance
  - Units: Percent
  - Description: General government public debt in percent of GDP
  - Source: IMF

- Variable: Inflation Targeting regime
  - Units: Dummy
  - Description: 1 if the country’s monetary policy framework is inflation targeting
  - Source: Roger (2009)

- Variable: CB autonomy  index
  - Units: Index number
  - Description: 1 corresponds to the highest level of the Central bank autonomy
  - Source: Arnone et al  (2007)

- Variable: Turnover
  - Units: Number of central bank governors per year
  - Description: Turnover rate of central bank governors
  - Source: Crowe-Meade (2007)

- Variable: Exchange rate stability
  - Units: Index number
  - Description: The exchange rate stability index ranges from 0 to 1
  - Source: AREAR 2011 (IMF)

- Variable: Governance
  - Units: Index number
  - Description: A rating reflecting bureaucratic quality, corruption, democratic accountability and law and order.
  - Source: International Country Risk Guide

- Variable: Regulatory quality
  - Units: Index number
  - Description: Captures perceptions of the ability of the government to formulate and implement sound policies and regulations that permit and promote private sector development.
  - Source: World Bank

- Variable: Labor market flexibility
  - Units: Index number
  - Description: Captures different types of labor market regulations. Ranges from 0 to 10. (Higher values denote a more flexible labor market.)
  - Source: 2011 Economic Freedom Dataset

*Content from _wp12225 - REFERENCES*

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