factors increased during 1986-2000.<sup>14</sup> However, since 2001, the global factors have again become more important than the group-specific factors for output growth and inflation. Although these trends were similar in direction, they were more pronounced for inflation than for output growth.

Evolution of global factors for output growth and inflation. Around the global oil price spikes in the 1970s and the oil price plunge in the mid- 2010s, global (and group-specific) factors for output growth and inflation moved in opposite directions, possibly indicating a major role of global supply shocks as the main drivers of global business and inflation cycles during these episodes. However, around global recessions and slowdowns, especially around the global financial crisis in 2008-09, the two global factors moved in tandem, probably due to demand shocks. This time- varying correlation between the two global factors is clearly observed for EMDE-specific factors (Figure 5).

Henriksen, Kydland, and Šustek (2013) examine this question in an international business cycle model with common technology shocks as well as cross-border technology spillovers. In their model, central banks’ policy rules are combined with a no-arbitrage condition between domestic and foreign interest rates to render current prices (and interest rates) a function of expected future output. This results in a stronger cross-country correlation in prices than in output. Alternatively, the difference in the degrees of synchronization may reflect the nature of global shocks or differential impacts of cross-border spillovers of shocks on inflation and output. If movements in the prices of internationally traded goods, such as swings in commodity prices, play an important role as global shocks, their impact on inflation could be greater and more immediate than their impact on output. Indeed, the degree of inflation synchronization is much higher than that of output growth during 1970-85, a period that witnessed multiple global shocks associated with sharp movements in oil prices. Considering that cross-border spillovers of shocks can drive global synchronization in inflation and output, structural changes can also influence real and nominal linkages across countries. For instance, the strong degree of output synchronization among advanced economies during 2001-17, which was slightly more pronounced than inflation synchronization during the same period, might partly reflect widespread and major economic disruptions during the global financial crisis.

# 4. Synchronization across different measures

# 4.1. Synchronization: different measures

The inflation synchronization discussed thus far refers to headline CPI inflation. However, the degree of inflation synchronization differs across various measures of inflation. To analyze these differences, a dynamic factor model is estimated using five measures of inflation with varying tradables content (headline CPI, core CPI, PPI, GDP deflator, and import prices).<sup>15</sup> Separately, a common factor to represent nontradables inflation is extracted from the three measures with below-average tradables content (core CPI, headline CPI, and GDP deflator), and a common

> 14 This is consistent with the findings on the “decoupling of macroeconomic variables between advanced economies and EMDEs” reported by Kose, Otrok, and Prasad (2012).

> 15 In price indexes for the United States, for example, the share of tradable goods and services is greatest for the PPI (54 percent), followed by headline CPI (53 percent), GDP deflator (26 percent), and core CPI (15 percent), according to the U.S. Bureau of Labor Statistics. The classification of sectors into tradables and nontradables here follows the earlier literature: agriculture, hunting, forestry and fishing, mining and quarrying, and manufacturing are classified as tradable sectors and the rest as nontradable (Knight and Johnson 1997).

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