simple average of Dubai, West Texas Intermediate, and Brent benchmarks), as reported by the World Bank’s monthly _Pink Sheet_ .

_Domestic output growth_ is quarter-on-quarter, seasonally adjusted real GDP growth, as reported by Haver Analytics and the World Bank’s _World Development Indicators_ . _Domestic inflation_ is quarter-on-quarter, seasonally adjusted headline CPI inflation, as reported in the World Bank’s _Global Database of Inflation_ (Ha, Kose, and Ohnsorge 2022). _Domestic interest rates_ are quarteron-quarter differences in three-month Treasury bill rates or monetary policy rates, as reported by Haver Analytics, the _Federal Reserve Economic Data_ (FRED) database, and the OECD’s database. The _Nominal effective exchange rate_ is the quarter-on-quarter change in trade-weighted nominal exchange rates, as reported by Haver Analytics and the IMF’s _International Financial Statistics_ .<sup>5</sup>

# **III. Role of global shocks**

# **III.1. Contributions of global shocks: Variance decompositions**

**_Contributions of global shocks._** Over the full sample period, global shocks accounted for nearly 26 percent of domestic inflation variance in the median country (see Table 1A). Domestic shocks explained the rest of the inflation variance. For the remainder of this paper, we focus our discussion on global shocks, the main interest of this study.<sup>6</sup>

Global demand shocks and oil price shocks were the main drivers of inflation in the average country, accounting for 18 and 4 percent of inflation variance, respectively, during 1970–2022. This finding is broadly consistent with earlier results reported by a few other studies (Conti, Neri, and Nobili 2015; Parker 2018). The relatively large role of global demand shocks (along with oil price shocks) in part reflected the major inflation swings around global recessions (Ha, Kose, and Ohnsorge 2021a and 2022) and around disruptive movements in oil markets in almost every decade in the last half century.

**_Contributions across countries._** The contribution of global shocks to inflation variation was, on average, considerably larger in advanced economies (35 percent) than in EMDEs (19 percent). Global demand shocks typically accounted for 25 percent of inflation variation in advanced economies and 14 percent in EMDEs. The importance of oil price shocks in driving inflation variance in advanced economies, at 6 percent, was also twice that of the 3 percent in EMDEs.

These findings likely reflect the greater homogeneity of advanced economies than of EMDEs and could be caused by a wide range of features advanced economies share—such as stronger global trade and financial linkages, deeper integration into global supply chains, and similar monetary policy regimes (see Table 1A). The similarity of monetary policy regimes, is, for example, also reflected in considerably more homogeneous inflation expectations in advanced economies than

> 5 Long-term components of quarterly growth rates are eliminated by using 15-year moving averages, following Stock and Watson (2012). The results are qualitatively robust to different detrending methods (for example, the HodrickPrescott or Butterworth filters). These robustness results are available upon request.

> 6 Detailed results on the importance of domestic shocks are available upon request from the authors.

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