How Does Trade Impact the Way GDP Growth and Inflation Comove Across Countries?

Abstract: Seemingly small international trade linkages can lead to substantial spillovers across countries, going a long way in explaining the well-documented global comovement in GDP growth and inflation across countries. The spillovers come largely from indirect effects, with shocks in a foreign country not only propagating to the domestic economy directly but also cumulating through the trade network via other foreign countries. We develop and estimate a model incorporating these network effects, and we find that inflationary shocks in Europe have substantial effects on U.S. inflation and that U.S. monetary policy has a sizeable impact on foreign economies.

Keywords: gross domestic product; international trade links; inflation; trade networks;

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Bibliographic Information

Provider: Federal Reserve Bank of Richmond

Part of Series: Richmond Fed Economic Brief

Publication Date: 2023-01

Volume: 23

Issue: 1