Analysing the spillover of inflation in selected Euro-area countries

We examined the spillover of inflation in selected Euro-area countries using monthly consumer price index (CPI) based inflation data covering the period 1955M1 to 2017M4. To achieve our objective, we used two recently developed methods of spillover: a time-domain spillover method, Diebold–Yilmaz (hereafter referred as DY method) and a frequency-domain method, Barunik–Krehlik (hereafter referred as BK method). We analysed 1–4 months and more than 4 months spillovers. The study has importance because the co-movement in the international inflation rates, among others, may be produced by common shocks, similarities in central bank reaction functions, international trade and the operation of purchasing power parity theory. However, to assess the synchronisation of inflation fluctuations across countries or regions, it is critical to understand the inflation behaviour and formulation of correct monetary policy.