Regional inflation dynamics using space-time models

This article provides empirical evidence of the role of spatial factors on the
determination of inflation dynamics for a representative set of tradable commodities
in Chile. We present a simple model that explains inflation divergence across regions
in a monetary union with similar preferences as a consequence of the geographical
allocation of producers in the different regions. Our results indicate that spatial allocation
together with transport costs are important determinants of regional inflation,
while macroeconomic common factors do not play an important role in this process.
Existing literature had obtained the opposite result for Europe, and the reasons for
this difference warrant further investigation. Moreover, we find that geographical distance
seems to be a more appropriate measure of neighbourhood than the adjacency
of regions. Our results are robust to different specifications, regression methods and
product groupings.