Strategic relevance of international inflation transmission for Europe and selected countries in the world

Abstract

Background: Recent research indicates that inflation dynamics are increasingly driven by global factors, reducing the role of domestic determinants. The growing synchronisation of inflation across countries limits the effectiveness of purely national policy responses and requires a strategic approach to macroeconomic management in an integrated global environment.

Purpose: This paper provides a comprehensive analysis of international inflation transmission over 1999–2023, including the post-pandemic high-inflation episode. The objective is to assess how cross-border inflation linkages reshape the strategic space for monetary policy and whether institutional integration amplifies transmission effects.

Study design/methodology/approach: Using monthly data, we compute Spearman correlation matrices, time-shifted cross-correlations, and systematic bivariate Granger causality tests. The analysis compares regional blocs, such as the euro area and G7, with small open economies to test for transmission hierarchies and the impact of common-currency regimes.

Findings/conclusions: Results confirm strong and persistent international inflation linkages, particularly within the euro area. Data reveal complex bidirectional relationships rather than a simple hierarchy from large to small economies, where small open economies often function as early indicators of global inflationary pressures. These findings imply constrained strategic autonomy for national policy-makers and highlight the necessity of close coordination and forward-looking risk management at the institutional level.

Limitations/future research: The reliance on bivariate causality tests limits the identification of specific structural transmission channels. Future research should apply multivariate structural models to capture evolving strategic spillovers and the impact of recent geopolitical tensions beyond the current sample period.