The Risk of Inflation Dispersion in the Euro Area

Stéphane Lhuissier, Aymeric Ortmans and Fabien Tripier

Working papers from Banque de France

Abstract: We introduce an approach to measure the risk of inflation dispersion among euro area countries. Our measure reflects the dissimilarity between the full predictive inflation distributions of member countries, and thus captures how "far" apart inflation levels are expected to be. The risk of inflation dispersion exhibits a countercyclical behavior along the business cycle. We document that the rising risk of inflation dispersion is mainly driven by a deterioration in financial conditions, while a robust anchoring of inflation expectations in each country tends to mitigate this risk. We further demonstrate that our measure has predictive power for future euro area inflation realizations as well as for variations in the monetary authority's interest rate.

Keywords: Inflation Dispersion; Kullback-Leibler; Euro area; Quantile Regression; Phillips Curve (search for similar items in EconPapers)
JEL-codes: D80 E31 E58 F45 G12 (search for similar items in EconPapers)
Pages: 45 pages
Date: 2024
New Economics Papers: this item is included in nep-cba, nep-eec, nep-eur and nep-mon
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https://www.banque-france.fr/system/files/2024-07/WP954_0.pdf

Related works:
Working Paper: The Risk of Inflation Dispersion in the Euro Area (2022)
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Persistent link: https://EconPapers.repec.org/RePEc:bfr:banfra:954

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