Macroeconomics

Spillover effect

Theoretical physics

Monetary policy

Inflation (cosmology)

Economics

Deflation

Keynesian economics

Physics

Monetary economics

Optimum currency area

International economics

Currency

Journal of International Money and Finance

We investigate the drivers of the recent inflation in three currency areas: the United States, the euro area, and the United Kingdom. To do so, we use a VAR set-up to examine the nature of the shocks that underpinned the recent inflation. We apply-two methods to calculate shocks – the standard Cholesky decomposition and a new method that captures more realistic shocks by solving the VAR backwards. We also use spatial modelling to investigate cross-country inflation spillovers. We find the inflationary shocks in the United States are transmitted to the euro area and the United Kingdom in a powerful and consistent way. The euro area transmits inflation to the other regions but to a lesser extent, while the inflation in the United Kingdom has little effect on the other two regions.

Drivers and spillover effects of inflation: The United States, the euro area, and the United Kingdom☆