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Inflation persistence in the euro area: the role of expectations

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  • Pablo Aguilar

Abstract

This article analyses agents’ perception of the period of low inflation in recent years, in the context of a model in which these agents form their expectations on the basis of simple forecasting rules. The approach used allows a distinction to be drawn between which portion of the low inflation phenomenon might be due to temporary factors and which might be considered permanent. The results of the analysis for the euro area suggest that agents perceive the inflation rate’s recent departure from the monetary policy objective to be predominantly temporary, although these deviations are marked by a considerable degree of persistence. In comparative terms, the estimated persistence in the case of the euro area of the deviations observed from the inflation target approximately double those in the United States over the 1-and 5-year horizons.

Suggested Citation

  • Pablo Aguilar, 2020. "Inflation persistence in the euro area: the role of expectations," Economic Bulletin, Banco de España, issue 4/2020.
    • Handle: RePEc:bde:journl:y:2020:i:12:d:aa:n:36
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    References listed on IDEAS

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    More about this item

    Keywords

    expectations; inflation; learning.;
    All these keywords.

    JEL classification:

    • C53 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Forecasting and Prediction Models; Simulation Methods
    • D84 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Expectations; Speculations
    • E30 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - General (includes Measurement and Data)
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy

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