Granular inflation spillovers

What is it about?

We test the granularity hypothesis to international inflation spillovers using annual exports and inflation data for 138 countries from 1991 to 2020. We find export volumes across countries are not Gaussian-distributed but follow a power law. This finding means the largest countries disproportionately impact world inflation. First, we quantify the power law for the right tail of the export volumes distribution and discuss its implications. Then, we compute the granular residual, a measure of shocks to the largest countries. We find that countries with higher relative weight in international trade determine a portion of international spillovers greater than their trade share. Moreover, eight big grains are responsible for the bulk of inflation spillovers. The policy implication is that other countries’ central banks should closely monitor the eight big grains when conducting their domestic monetary policy.

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