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Understanding inflation dynamics in the Euro Area: deviants and commonalities across member countries

Johanna Amberger () and Ralf Fendel ()
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Johanna Amberger: WHU – Otto Beisheim School of Management
Ralf Fendel: WHU – Otto Beisheim School of Management

Empirica, 2017, vol. 44, issue 2, 261-293

Abstract: Abstract Central to this paper is the analysis of inflation dynamics in the Euro Area as well as in eleven individual Euro Area member countries between 1990 and 2012. Based on the hybrid new Keynesian Phillips curve, the analyses include survey measures from Consensus Economics to compare inflation dynamics across Euro Area member countries. Particular focus is set on the choice of suitable measures of real marginal cost. In addition to the well-known output gap, the role of finance-neutral output gaps and unemployment gaps is examined. Throughout the analyses, price setting is found to be largely backward-looking, but with a decreasing trend over time. Countries’ varying sensitivity to the different measures of real marginal cost is highlighted, which may indicate persistent heterogeneity in Euro Area inflation dynamics. With the onset of the financial crisis, finance-neutral output gaps outperform alternative measures of real marginal cost.

Keywords: Inflation; Phillips curve; Output gap; Financial cycle; Unemployment gap (search for similar items in EconPapers)
JEL-codes: E31 E32 O52 (search for similar items in EconPapers)
Date: 2017
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