Inflation surprises across developed and emerging economies

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I construct a novel data-set containing monthly inflation surprises for a set of developed and emerging economies. These data are used in a panel setting to analyze the relationship between inflation surprises and changes in short- and long-term interest rates as well as exchange rates on CPI release days. I find that a 1% upward surprise in monthly inflation is associated with (1) a +7.4bps daily change in the two-year benchmark interest rate; (2) a +5.1bps daily change in the ten-year rate and (3) an appreciation in the domestic exchange rate relative to the U.S. Dollar. Such sensitivities are heterogeneous across country groups. Interest rates in emerging economies are more sensitive to inflation surprises than those in developed markets. In contrast, exchange rates in emerging markets appear to be less sensitive to such surprises relative to developed counterparts.

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