Inflation dynamics during the financial crisis in Europe: Cross-sectional identification of long-run inflation expectations

Geraldine Dany-Knedlik and Oliver Holtemöller

No 10/2017, IWH Discussion Papers from Halle Institute for Economic Research (IWH)

Abstract: We investigate drivers of Euro area inflation dynamics using a panel of regional Phillips curves and identify long-run inflation expectations by exploiting the crosssectional dimension of the data. Our approach simultaneously allows for the inclusion of country-specific inflation and unemployment-gaps, as well as time-varying parameters. Our preferred panel specification outperforms various aggregate, uni- and multivariate unobserved component models in terms of forecast accuracy. We find that declining long-run trend inflation expectations and rising inflation persistence indicate an altered risk of inflation expectations de-anchoring. Lower trend inflation, and persistently negative unemployment-gaps, a slightly increasing Phillips curve slope and the downward pressure of low oil prices mainly explain the low inflation rate during the recent years.

Keywords: inflation dynamics; inflation expectations; trend inflation; nonlinear state space model; panel UCSV model; Euro area (search for similar items in EconPapers)
JEL-codes: C32 E31 E5 (search for similar items in EconPapers)
Date: 2017
New Economics Papers: this item is included in nep-cba, nep-eec, nep-mac and nep-mon
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (7)

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Related works:
Working Paper: Inflation dynamics during the Financial Crisis in Europe: cross-sectional identification of long-run inflation expectations (2018)
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Persistent link: https://EconPapers.repec.org/RePEc:zbw:iwhdps:102017

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