The authors test the granularity hypothesis to international inflation spillovers using annual exports and inflation data for 138 countries from 1991 to 2020. This study aims to discuss the aforementioned objective.
First, the authors quantify the power law for the right tail of the export volumes distribution and discuss its implications. Then, the authors compute the granular residual, a measure of shocks to the largest countries.
The authors find export volumes across countries are not Gaussian-distributed but follow a power law. This finding means the largest countries disproportionately impact world inflation. In addition, the authors 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.
This is the first study spotting the problem of granular inflation spillovers.
