Has Inflation Persistence Changed under EMU?

Tillmann Peter
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Tillmann Peter: Justus-Liebig-University Giessen,Giessen, Germany

German Economic Review, 2012, vol. 13, issue 1, 86-102

Abstract: This paper analyzes the persistence of inflation in the euro area and, in particular, whether the persistence properties have changed since the start of European Monetary Union(EMU). For that purpose, we compare pre- and post-EMU inflation persistence, use rolling-window estimates of persistence, and apply tests specifically designed to detect break dates near the end of the sample period. In contrast to previous research, we find that inflation persistence has fallen significantly since the start of EMU. Persistence of consumer price inflation, which is central to the European Central Bank’s policy mandate, has fallen more than the persistence of deflator inflation. The drop in inflation persistence is consistent with the results from a simulated small New Keynesian model with a shift toward a more aggressive monetary policy stance.

Keywords: Inflation persistence; structural change; sum of autoregressive coefficients; autoregressive root; end-of-sample breakpoint tests; European Monetary Union (search for similar items in EconPapers)
Date: 2012
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DOI: 10.1111/j.1468-0475.2011.00549.x

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