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Can aggregation explain the persistence of inflation?

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  • Altissimo, Filippo
  • Mojon, Benoit
  • Zaffaroni, Paolo

Abstract

An aggregation exercise is proposed that aims at investigating whether the fast average adjustments of the disaggregate inflation series of the euro area CPI is coherent with the slow adjustment of euro area aggregate inflation. Estimating a dynamic factor model for 404 inflation sub-indices of the euro area CPI allows to decompose the dynamics of inflation sub-indices into a part due to a common macroeconomic shock and to sector specific idiosyncratic shocks. Although idiosyncratic shocks dominate the variance of sectoral prices, one common factor appears to be the main driver of aggregate dynamics. In addition, the heterogenous propagation of this common shock across sectoral inflation rates, and in particular its slow propagation to inflation rates of services, generates the persistence of aggregate inflation. We conclude that the aggregation mechanism explains a significant amount of aggregate inflation persistence.

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Bibliographic Info

Article provided by Elsevier in its journal Journal of Monetary Economics.

Volume (Year): 56 (2009)
Issue (Month): 2 (March)
Pages: 231-241

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Handle: RePEc:eee:moneco:v:56:y:2009:i:2:p:231-241

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Web page: http://www.elsevier.com/locate/inca/505566

Related research

Keywords: Inflation Persistence Aggregation Euro area Price stickiness;

References

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  1. Mark Bils & Peter J. Klenow, 2004. "Some Evidence on the Importance of Sticky Prices," Journal of Political Economy, University of Chicago Press, vol. 112(5), pages 947-985, October.
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  9. Mario Forni & Marc Hallin & Marco Lippi & Lucrezia Reichlin, 2000. "The Generalized Dynamic-Factor Model: Identification And Estimation," The Review of Economics and Statistics, MIT Press, vol. 82(4), pages 540-554, November.
  10. Zaffaroni, Paolo, 2004. "Contemporaneous aggregation of linear dynamic models in large economies," Journal of Econometrics, Elsevier, vol. 120(1), pages 75-102, May.
  11. Laurent Bilke, 2005. "Break in the mean and persistence of inflation - a sectoral analysis of French CPI," Working Paper Series 463, European Central Bank.
  12. Carlos Carvalho, 2005. "Heterogeneity in Price Setting and the Real Effects of Monetary Shocks," Macroeconomics 0509017, EconWPA, revised 12 Sep 2005.
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  14. Bilke, L., 2005. "Break in the Mean and Persistence of Inflation: a Sectoral Analysis of French CPI," Working papers 122, Banque de France.
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