Since there are no cross-product terms between the factors, the variance in inflation attributable to the global factor is: The variance shares due to the group factors and idiosyncratic terms are calculated using a similar approach.

# 2.2. Data

The analysis is based on annual inflation data for 99 countries, 25 advanced economies and 74 EMDEs (including 16 LICs), for 1970-2017. In the benchmark estimation, inflation is measured as annual headline CPI inflation and output growth.<sup>8</sup> To analyze the extent of synchronization in multiple measures of inflation, the database is augmented with core CPI inflation, PPI inflation, import price inflation, and GDP deflator growth for a subset of 38 countries (of which 13 are EMDEs). The list of the countries is presented in Table 1.

# 3. Inflation synchronization

# 3.1. Synchronization: Global and group factors

The model identifies a global inflation factor that, as expected, registers sharp movements around oil price spikes and global recessions (Figure 2). Within a year of an average global recession (such recessions having occurred in 1975, 1982, 1991, and 2009) and during the average oil price plunge (these having occurred in 1986, 1990-91, 1997-98, 2001, 2008, and 2014-16), annual global inflation fell by 0.5 and 0.2 percentage point, respectively, below its long-term trend. Conversely, in the average year preceding a global recession, global inflation was almost 2 percentage points above trend. The global factor moved in tandem with median inflation across countries.<sup>9</sup> The advanced economy and EMDE factors also exhibited common (although more muted) movements with their respective group-specific median inflation rates.

During 1970-2017, the global inflation factor accounted for a sizable share of within-country inflation variance in advanced economies and EMDEs (Figure 3; Table 2). In the median country, the global factor accounted for 12 percent of inflation variation, but its role varied widely across and within country groups (from near zero to 70 percent). For example, for the full sample period, the contribution of the global inflation factor was much greater in the median advanced economy (24 percent) than in the median EMDE (10 percent). The group-specific factors have also played

> 8 Long-term trends (proxied by 15-year moving averages) in national inflation rates and output growths are eliminated. In Appendix, robustness of the main results to different data frequencies (e.g., the use of quarterly data) or different de-trending methods are tested.

> 9 For 90 percent of the countries in the sample, the factor loadings on the global factor (coefficients associated with the global factor in the model) are positive (and statistically significant within 90 percent confidence intervals), indicating that national inflation rates generally move in tandem with the global factor. The remaining 10 percent of the countries are mostly, although not exclusively, in Sub-Saharan Africa (Algeria, Cameroon, Central African Republic, Democratic Republic of Congo, Gabon, Gambia, Mali, Niger, Saudi Arabia, and Senegal). In these countries, the factor loadings on the global factor are not statistically significantly different from zero.

7