Inflation dynamics during the financial crisis in Europe: Cross-sectional identification of long-run inflation expectations
Geraldine Dany-Knedlik and
No 10/2017, IWH Discussion Papers from Halle Institute for Economic Research (IWH)
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 E5 E31 (search for similar items in EconPapers)
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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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