What Drives Inflation and How: Evidence from Additive Mixed Models Selected by cAIC
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We analyze which forces explain inflation and how in a large panel of 124 countries from 1997 to 2015. Models motivated by economic theory are compared to an approach based on model-based boosting and non-linearities are explicitly considered. We provide compelling evidence that the interaction of energy price and energy rents stand out among 40 explanatory variables. The output gap and globalization are also relevant drivers of inflation. Credit and money growth, a country's inflation history and demographic changes are comparably less important while central bank related variables as well as political variables turn out to have the least empirical relevance. In a subset of countries public debt denomination and exchange rate arrangements also play a noteworthy role in the inflation process. By contrast, other public-debt variables and an inflation targeting regime have weaker explanatory power. Finally, there is clear evidence of structural breaks in the effects since the financial crisis.
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