Global vector autoregression approach: An application on the globalization hypothesis of inflation

Economic globalization, which has accelerated since the 1960s, has led to changes in the dynamics of national economies. Despite this change, economic and econometric models have remained nationally centered until recent years. Therefore, studies on country economies focus solely on national factors and it can be said that the findings are weak reflecting the reality. Monetary authorities have particularly criticized this deficiency. The Global VAR approach, developed for this purpose, enables the world economy to participate in the analysis as a whole. It is also comprehensive global analytical technique that takes account of inter-country economic ties through a commercial or financial weight matrix. Using Global VAR approach in this study, the validity of the globalization of inflation hypothesis, which suggests that the effect of global factors on the inflation rate is increased, has been investigated. A total of 42 countries have been analyzed OECD countries including Turkey and the countries in close cooperation with OECD. In analysis with quarterly data covering the period 1992:1-2017:2, the impact of globalization on inflation has been monitored through the global output gap. The global output gap was established by using the time-varying weight matrix calculated over the bilateral trade volume values of the countries in 1992-2017. The findings show that the global output gap is significantly positive on inflation rates in most of countries. Hence the hypothesis of the globalization of inflation is determined to be partially valid. Particularly in Turkey, the global output gap is not an important variable on the inflation rate but should be careful about oil prices and national shocks. As a result, it is crucial that market makers, especially monetary authorities, should take the necessary precautions to global factors by considering the inter-country integration, to ensure that policies are carried out successfully.