A Bottom-Up Reduced Form Phillips Curve for the Euro Area
A Bottom-Up Reduced Form Phillips Curve for the Euro Area

Author: Thomas McGregor

Publisher: International Monetary Fund

Published: 2022-12-16

Total Pages: 46

ISBN-13:

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We develop a bottom-up model of inflation in the euro area based on a set of augmented Phillips curves for seven subcomponents of core inflation and auxiliary regressions for non-core items. We use the model’s disaggregated structure to explore which factors drove the deterioration in forecasting performance during the pandemic period and use these insights to improve on the ability to forecast inflation. In the baseline, the projection for core inflation is centered above 3 percent at end-2023, while headline inflation is expected to drop quite sharply over 2023, with energy base effects pulling inflation down from the currently very elevated levels to below 3 percent by 2023q4. The confidence intervals around these projections are wide given elevated uncertainty. We argue that the bottom-up approach offers a useful complement to the forecasters toolbox – even in the current uncertain environment - by improving forecast accuracy, shedding additional light on the drivers of inflation and providing a framework in which to apply ex post judgement in a structured way.

The Phillips Curve in the Euro Area
The Phillips Curve in the Euro Area

Author: Susanne Wellmann

Publisher:

Published: 2023

Total Pages: 0

ISBN-13:

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We study whether the trade-off between inflation and unemployment still exists in the euro area (EA). Using country-level data for member states of the EA, we estimate a refined specification of the Phillips curve in the spirit of Hazell et al. (2022) deploying a non-tradable price index to measure inflation. We find that the slope of the Phillips curve is small and hence the Phillips curve is flat in the EA, similarly to the US. Moreover, reference estimates based on aggregate data overstate the steepness of the Phillips curve considerably. Our findings imply that the insensitivity of inflation with respect to unemployment over the last decade is a result of firmly anchored inflation expectations.

A Phillips Curve for the Euro Area
A Phillips Curve for the Euro Area

Author: Laurence M. Ball

Publisher:

Published: 2019

Total Pages: 0

ISBN-13:

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This paper asks whether a textbook Phillips curve can explain the behavior of core inflation in the euro area. A critical feature of the analysis is that we measure core inflation with the weighted median of industry inflation rates, which is less volatile than the common measure of inflation excluding food and energy prices. We find that fluctuations in core inflation since the creation of the euro are well explained by three factors: expected inflation (as measured by surveys of forecasters); the output gap (as measured by the OECD); and the pass-through of movements in headline inflation. Our specification resolves the puzzle of a "missing disinflation" after the Great Recession, and it diminishes the puzzle of a "missing inflation" during the recent economic recovery.

Understanding Euro Area Inflation Dynamics: Why So Low for So Long?
Understanding Euro Area Inflation Dynamics: Why So Low for So Long?

Author: Mr.Yasser Abdih

Publisher: International Monetary Fund

Published: 2018-08-22

Total Pages: 25

ISBN-13: 1484372565

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Despite closing output gaps and tightening labor markets, inflation has remained low in the euro area. Based on an augmented Phillips Curve framework, we find that this phenomenon—sometimes attributed to low global inflation—has been primarily caused by a remarkable persistence of inflation, keeping it low despite the reduction in slack. This feature is shown to be specific to the euro area (in comparison with the United States). Monetary policy needs to stay accommodative to help guide inflation back to target.

At what Cost Price Stability?
At what Cost Price Stability?

Author: Andrea Beccarini

Publisher: CEPS

Published: 2008

Total Pages: 32

ISBN-13: 9290798130

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With inflation increasing all over the world, central banks have to consider with some care how quickly to re-establish price stability. A key issue in this context is the short-run cost in terms of foregone output and higher unemployment. The aim of this paper is to determine the 'sacrifice ratio' for the Euro Area and for the United States. The main findings are: the cost of reducing inflation is in most cases higher in the US than in the EA. For example, reducing (headline) inflation by 1% point requires a decline of output of 1.4% in the EU, but 2.3% for the US. Considering core inflation, the sacrifice ratio in terms of output is somewhat higher for the Euro Area (around 4) compared to 3.2 for the US. However, the sacrifice ratios in terms of unemployment are always much larger for the US. Reducing headline inflation by 1% requires an increase in unemployment of little more than 1% in the EA, compared to 8% in the US.However, there is also a long-run 'hysterisis' cost that is specific to the Euro Area since the reaction of unemployment to output depends on the state of the economy. During downturns this relationship worsens. This implies that a recession engineered to combat inflation will have an additional cost in terms of lower unemployment later, even after the recovery of the economy.

Phillips Curves in the Euro Area
Phillips Curves in the Euro Area

Author: Laura Moretti

Publisher:

Published: 2019

Total Pages:

ISBN-13: 9789289935579

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We perform a robust estimation of the Phillips curve in the euro area using a battery of 630 theory-driven models. We extend the existing literature by adding model specifications, taking into account the uncertainty in the measurement of variables and testing for potential non-linearities and structural changes. Using Dynamic Model Averaging, we identify the most important determinants of inflation over the sample. We then forecast core inflation 12 quarters ahead and present its probability distribution. We compare the distribution of forecasts performed in recent years, and we assess, in a probabilistic manner, the convergence towards a sustainable path of inflation.

European Inflation Dynamics
European Inflation Dynamics

Author: Jordi Galí

Publisher:

Published: 2001

Total Pages: 54

ISBN-13:

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We provide evidence on the fit of the New Phillips Curve (NPQ for the Euro area over the period 1970-1998, and use it as a tool to compare the characteristics of European inflation dynamics with those observed in the U.S. We also analyze the factors underlying inflation inertia by examining the cyclical behavior of marginal costs, as well as that of its two main components, namely, labor productivity and real wages. Some of the findings can be summarized as follows: (a) the NPC fits Euro area data very well, possibly better than U.S. data, (b) the degree of price stickiness implied by the estimates is substantial, but in line with survey evidence and U.S. estimates, (c) inflation dynamics in the Euro area appear to have a stronger forward- looking component (i.e., less inertia) than in the U.S., (d) labor market frictions, as manifested in the behavior of the wage markup, appear to have played a key role in shaping the behavior of marginal costs and, consequently, inflation in Europe.

The Improbable Renaissance of the Phillips Curve
The Improbable Renaissance of the Phillips Curve

Author: Lourdes Acedo Montoya

Publisher:

Published: 2011

Total Pages: 34

ISBN-13: 9789279192302

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"Why has euro area (core) inflation not fallen further during and after the "great recession"? How different are inflation dynamics across Member States? This paper analyses core inflation dynamics in the euro area and its Member States using a hybrid specification of the Phillips curve. Inflation expectations are directly observed from an expert survey, so no assumptions need to be imposed about expectations formation. The choice of the hybrid Phillips curve framework is vindicated, as the data clearly indicate the relevance of both backward-looking inflation and inflation expectations. The impact of the output gap on core inflation is significant but not large. The combination of stable inflation expectations, sluggish price adjustment and an only moderate impact of the output gap on inflation helps understanding the stability of core inflation despite large and persistent output gaps in the aftermath of the crisis. Although the heterogeneity of Phillips curve relationships across Member States is not large, the exceptionally large output gap caused by the crisis is one driver (among others) of the recently observed inflation differentials in the euro area"--Publication information p.