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Euro area inflation: long-run determinants and short-run dynamics

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Author Info
Melisso Boschi
Alessandro Girardi

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Abstract

This study adopts the long-run structural VAR approach to analyse the determinants of inflation in the Euro Area economy over the period 1985:1--2003:2. Theoretical relationships link inflation to markup and output gap, respectively. The short-run dynamic properties of inflation are investigated using a structural VECM. Inflation is explained by a mixture of supply- and demand-side factors, both in the long- and the short-run. The simulation exercise indicates that a positive shock to inflation could have a favourable re-distributional income effect on wage earners and non-detrimental consequences either on productivity and on competitiveness. Finally, the model produces satisfactory out-of-sample forecasts.

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Publisher Info
Article provided by Taylor and Francis Journals in its journal Applied Financial Economics.

Volume (Year): 17 (2007)
Issue (Month): 1 (January)
Pages: 9-24
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Handle: RePEc:taf:apfiec:v:17:y:2007:i:1:p:9-24

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  1. Eliana González Molano & Luis Fernando Melo Velandia & Anderson Grajales Olarte, . "Pronósticos directos de la inflación colombiana," Borradores de Economia 458, Banco de la Republica de Colombia. [Downloadable!]
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