Inflation and the Current Account in the Euro Area

Vahagn Galstyan

No 4/EL/19, Economic Letters from Central Bank of Ireland

Abstract: The euro area current account was on average in balance over 1999-2010 period, while the average rate of inflation was close to the ECB target. In contrast, the post-2011 increase in the euro area current account surplus has been accompanied by a period of low inflation. This paper suggests that observed low inflation can be partly explained by the surplus in the external balance. I propose a version of an open-economy inflation Phillips curve showing that, in addition to output gap and inflationary expectations, inflation is also shaped by the trade balance. At an empirical level, I find a statistically significant and negative correlation between the two variables.

Date: 2019-05
New Economics Papers: this item is included in nep-eec, nep-mac, nep-mon and nep-opm
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Citations: View citations in EconPapers (10)

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