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Fast micro und slow macro: can aggregation explain the persistence of inflation?

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Author Info
Filippo Altissimo () (Brevan Howard, Almack House, 28 King Street, London, SW1Y 6XA, UK.)
Benoît Mojon () (Federal Reserve Bank of Chicago, 230 S La Salle St., Chicago, IL 60604, USA.)
Paolo Zaffaroni () (Tanaka Business School, Imperial College London, South Kensington campus, London SW7 2AZ, UK.)

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Abstract

An aggregation exercise is proposed that aims at investigating whether the fast average adjustment of the disaggregate inflation series of the euro area CPI translates into the slow adjustment of euro area aggregate inflation. We first estimate a dynamic factor model for 404 inflation sub-indices of the euro area CPI. This allows to decompose the dynamics of inflation sub-indices in two parts: one due to a common "macroeconomic" shock and one due to sector specific "idiosyncratic" shocks. Although "idiosyncratic" shocks dominate the variance of sectoral prices, one common factor, which accounts for 30 per cent of the overall variance of the 404 disaggregate in.ation series, is 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 in.ation. We conclude that the aggregation process explains a fair amount of aggregate in.ation persistence. JEL Classification: E31; E32.

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Paper provided by European Central Bank in its series Working Paper Series with number 729.

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Length: 39 pages
Date of creation: Feb 2007
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Handle: RePEc:ecb:ecbwps:20070729

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Keywords: Inflation dynamics; aggregation and persistence; euro area.;

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This paper has been announced in the following NEP Reports: References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
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  6. Mankiw, N Gregory, 2001. "The Inexorable and Mysterious Tradeoff between Inflation and Unemployment," Economic Journal, Royal Economic Society, vol. 111(471), pages C45-61, May. [Downloadable!] (restricted)
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  16. Andrew T. Levin & Jeremy M. Piger, 2004. "Is inflation persistence intrinsic in industrial economies?," Working Paper Series 334, European Central Bank. [Downloadable!]
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  22. Todd E. Clark, 2003. "Disaggregate evidence on the persistence of consumer price inflation," Research Working Paper RWP 03-11, Federal Reserve Bank of Kansas City. [Downloadable!]
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Full references

Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Joseph P. Byrne & Norbert Fiess, 2007. "Euro Area Inflation: Aggregation Bias and Convergence," Working Papers 2007_41, Department of Economics, University of Glasgow. [Downloadable!]
  2. Eric Jondeau & Jean-Guillaume Sahuc, 2008. "Optimal Monetary Policy in an Estimated DSGE Model of the Euro Area with Cross-Country Heterogeneity," International Journal of Central Banking, International Journal of Central Banking, vol. 4(2), pages 23-72, June. [Downloadable!]
    Other versions:
  3. Boivin, Jean & Giannoni, Marc & Mihov, Ilian, 2007. "Sticky Prices and Monetary Policy: Evidence from Disaggregated US Data," CEPR Discussion Papers 6101, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
    Other versions:
  4. Rafal Raciborski, 2008. "Searching for additional sources of inflation persistence : the micro-price panel data approach," Research series 200804-04, National Bank of Belgium. [Downloadable!]
  5. Ian Babetskii & Fabrizio Coricelli & Roman Horváth, 2007. "Measuring and Explaining Inflation Persistence: Disaggregate Evidence on the Czech Republic," Working Papers IES 2007/22, Charles University Prague, Faculty of Social Sciences, Institute of Economic Studies, revised Aug 2007. [Downloadable!]
    Other versions:
  6. Jukka Jalava & Ilja Kristian Kavonius, 2007. "Durable goods and their effect on household saving rations in the euro area," Working Paper Series 755, European Central Bank. [Downloadable!]
  7. Jean Imbs & Eric Jondeau & Florian Pelgrin, 2007. "Aggregating Phillips curves," Working Paper Series 785, European Central Bank. [Downloadable!]
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  8. Giovanni Caggiano & Efrem Castelnuovo, 2008. "Long Memory and Non-Linearities in International Inflation," "Marco Fanno" Working Papers 0076, Dipartimento di Scienze Economiche "Marco Fanno". [Downloadable!]
  9. Todd E. Clark, 2006. "Disaggregate evidence on the persistence of consumer price inflation," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 21(5), pages 563-587. [Downloadable!]
    Other versions:
  10. Andrea Vaona & Guido Ascari, 2007. "Regional Inflation Persistence: Evidence from Italy," Quaderni della facoltà di Scienze economiche dell'Università di Lugano 0807, Biblioteca universitaria di Lugano (University Library of Lugano). [Downloadable!]
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