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

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Author Info
Melisso Boschi () (University of Essex)
Alessandro Girardi () (ISAE - Institute for Studies and Economic Analyses)

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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 demandside factors, both in the long- and the short-run. Our simulation exercise indicates that a positive shock to inflation could have a favourable redistributional 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
Paper provided by ISAE - Institute for Studies and Economic Analyses - (Rome, ITALY) in its series ISAE Working Papers with number 60.

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Length: 41 pages
Date of creation: Dec 2005
Date of revision:
Handle: RePEc:isa:wpaper:60

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Related research
Keywords: Inflation; markup; Euro Area; long-run structural VARs; subset VECM; impulse response analysis; forecasting;

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Find related papers by JEL classification:
C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions
E00 - Macroeconomics and Monetary Economics - - General - - - General
E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
E37 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Forecasting and Simulation

References listed on IDEAS
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(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. 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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