which have in turn led to more synchronized movements in inflation. Stronger trade linkages increase an economy’s exposure to external shocks. As a result, domestic inflation has become more sensitive to global shocks that raise or lower import prices (Bianchi and Civelli 2015).<sup>4</sup> Prices are more likely to be internationally determined in sectors with strong trade linkages to global markets where they are subject to common demand and supply shocks (Karagedikli, Mumtaz, and Tanaka 2010; Parker 2018). Besides, rapidly expanding global supply chains allow global supply and demand shocks as well as commodity price swings to ripple through global input-output linkages and global labor markets and cause comovement in national inflation rates (Rogoff 2003; Auer, Borio, and Filardo 2017).

Greater international competition has made domestic inflation less sensitive to domestic output gaps, flattening Phillips curves (Eickmeier and Pijnenburg 2013; Carney 2017; Kabukçuo ğ lu and Martínez-García 2018). In addition, increased international integration of financial markets has been accompanied by greater synchronization of financial conditions—including financial stress— across countries (Neely and Rapach 2011; Carney 2017). As a result, movements in domestic demand and disinflationary or inflationary pressures are also synchronized across countries. Finally, technological changes, in addition to deepening supply chains, can also help globalize markets for nontradable service sectors. This may extend and deepen the impact of global forces on domestic inflation (Henriksen, Kydland, and Šustek 2013).

Using a wide range of methodologies, a large literature has studied various aspects of inflation synchronization across countries and its evolution over time. Several studies have documented the high degree of inflation synchronization in recent decades, mostly, but not exclusively, in advanced economies. Some of these also report that the degree of synchronization has increased over the past three decades. The literature has documented that inflation is highly synchronized internationally, but that the degree of inflation synchronization varies with country characteristics and other factors, including the measure of inflation used. Findings have typically been restricted to headline CPI inflation, largely disregarding sectoral differences in inflation synchronization.

Several studies have documented that a global factor has accounted for a substantial proportion— ranging from 20 to 51 percent—of inflation variation among various groups of advanced economies, with the estimated contribution differing somewhat by inflation measure, time period, methodology, and sample composition.<sup>5</sup> Ciccarelli and Mojon (2010) extract a common global factor from the consumer price index (CPI) inflation of 22 OECD countries over 1960-2008. They find that the global factor accounts for almost 37 percent of the variance of national inflation rates. Hakkio (2009) extracts a global factor from 19 OECD countries’ inflation rates for 19602008 but adds a regional factor and expands the set of inflation measures to include overall CPI inflation, cyclical CPI inflation, core CPI inflation, and cyclical core CPI inflation. He finds that the global factor explains, on average, 41 percent of cyclical inflation variation. Auer, Levchenko, and Sauré (2017) estimate a global inflation factor using a sample of 30 countries and find that the global factor accounts for 51 percent of inflation variation, half of which reflects common cost shocks propagated through input-output linkages (see also Auer and Mehrotra 2014). These

> 4 This study is broadly in line with the literature that investigates the role of international input-output linkages in driving the synchronization of global business cycles (Kose and Yi 2006; di Giovanni and Levchenko 2010; Johnson 2014). Martínez-García (2015) develops a new open-economy macro model for the United States and 38 of its trading partners. The model can account for inflation synchronization even in the absence of common shocks, simply through the presence of strong spillovers associated with trade linkages.

> 5 See Table A.1 in Appendix for a summary of these studies.

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