Disaggregated Economic Complexity and Inflation in OECD Countries

This study probes the intricate relationship between economic complexity and inflation dynamics, an area that has been relatively under-researched despite the potential for economic complexity to predict inflation. We focus on selected OECD countries and use panel data from 1998 to 2021. Utilizing a Panel Autoregressive Distributed Lag (PARDL) model, we analyze both short- and long-term dynamics across various components of inflation. Our analysis encompasses both aggregate and disaggregated indicators of complexity, including ECI-Trade, ECI-Technology, and ECI-Research. The results indicate that the impact of economic complexity on inflation differs depending on the type of inflation and the time frame considered. Generally, economic complexity tends to have a deflationary effect on headline and food inflation in the long run. However, core inflation exhibits a positive long-term response, likely due to supply chain dynamics and demand driven by innovation. These findings provide significant policy implications, particularly for inflation-targeting strategies, which need to consider the structural characteristics and the evolving influence of economic complexity in contemporary economies.