global variables in the first four quarters, global shocks can affect country-specific variables (without any sign or zero restrictions).

The identification strategy is based on the following assumptions, combining sign and short-term restrictions as shown above: A positive global demand shock triggers a simultaneous increase in global output growth, global inflation, and oil prices.<sup>5</sup> A positive global supply shock leads to higher global output growth and oil prices but lower global inflation. A positive oil price shock induces an increase in oil prices and global inflation but a drop in global output growth. Finally, global shocks can have contemporaneous effects on domestic variables, but domestic shocks can only influence global variables with a lag.

A positive country-specific supply or demand shock increases country-specific output growth. However, a country-specific supply shock reduces domestic inflation, whereas a country-specific demand shock increases it. A positive interest rate shock (corresponding to a contractionary monetary policy) initially increases the domestic interest rate and results in an appreciation of the domestic currency, while it decreases domestic output growth and inflation. Finally, a positive exchange rate shock (corresponding to an appreciation of the domestic currency) only assumes an increase in the exchange rate, while its impact on other domestic variables is left unrestricted. All country-specific shocks are assumed to affect country-specific variables on impact through the corresponding sign restrictions, although the robustness checks also consider such restrictions lasting for an alternative number of periods.<sup>6</sup> The system is estimated on a country-by-country basis using quarterly data with two lags, as in Charnavoki and Dolado (2014). The Bayesian estimation used searches for 1,000 successful draws of at least 2,000 iterations with 1,000 burn-ins. The results shown in the paper are based on the median of these 1,000 successful draws and 68 percent confidence sets at the country level, although alternative presentation methodologies (for example, the median target, as in Fry and Pagan 2011) are considered as a robustness check. In the Bayesian estimation, Minnesota priors proposed by Litterman (1986) are used; since the Minnesota prior assumes that the variancecovariance matrix of residuals is known, we use the entire variance-covariance matrix of the vector autoregression estimated by ordinary least squares. For the actual estimation, the identification strategy through the algorithm introduced by Arias, Rubio-Ramirez, and Waggoner (2014) is used, where the standard Cholesky decomposition is employed together with an additional orthogonalization step that is necessary to produce a posterior draw from the correct distribution for structural vector autoregression coefficients.

The results for the role of global and domestic shocks in domestic inflation are presented as median point estimates across countries. Interquartile ranges indicate the range from the 25th to the 75th quartile of country-specific estimates (for example, Forbes, Hjortsoe, and Nenova 2017). For presentational clarity, and consistent with other studies in the literature, the country-specific confidence sets are calculated but not presented.

> 5 Global shocks are derived from a separate tri-dimensional vector autoregression model that incorporates global output growth, global inflation, and oil price changes, following the approach of Charnavoki and Dolado (2014) and Uhlig (2005).

> 6 An alternative specification also assumes that positive domestic demand shocks lead to a contemporaneous increase in domestic interest rates. See Appendix 2 for the results with robustness exercises.

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