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Inflation in Europe after the Great Recession

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  • Mazumder, Sandeep

Abstract

Inflation in Europe fell sharply after the Great Recession in 2008 due to the severity of the financial crisis. However, the post-recession sharp decline in inflation in 2012 was not anticipated by most observers. This paper seeks to explain this behavior of eurozone core inflation, which we do by estimating a Phillips curve with professional forecasters' inflation expectations. Doing so produces inflation predictions that closely match the observed behavior of core inflation, whereas lagged expectations fail to predict the 2012 disinflation. Furthermore, we find that short-term inflation expectations are most relevant for the euro area, rather than longer-term ones. Indeed the evidence suggests that the ECB's inflation anchor of 2% has weakened since the Great Recession, and is something that should cause policymakers a lot of concern.

Suggested Citation

  • Mazumder, Sandeep, 2018. "Inflation in Europe after the Great Recession," Economic Modelling, Elsevier, vol. 71(C), pages 202-213.
  • Handle: RePEc:eee:ecmode:v:71:y:2018:i:c:p:202-213
    DOI: 10.1016/j.econmod.2017.12.014
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    Cited by:

    1. James H. Stock & Mark W. Watson, 2019. "Slack and Cyclically Sensitive Inflation," NBER Working Papers 25987, National Bureau of Economic Research, Inc.
    2. Conti, Antonio M., 2021. "Resurrecting the Phillips Curve in Low-Inflation Times," Economic Modelling, Elsevier, vol. 96(C), pages 172-195.
    3. Antonio M. Conti & Andrea Nobili, 2019. "Wages and prices in the euro area: exploring the nexus," Questioni di Economia e Finanza (Occasional Papers) 518, Bank of Italy, Economic Research and International Relations Area.
    4. Antonio M. Conti & Concetta Gigante, 2018. "Weakness in Italy�s core inflation and the Phillips curve: the role of labour and financial indicators," Questioni di Economia e Finanza (Occasional Papers) 466, Bank of Italy, Economic Research and International Relations Area.
    5. James H. Stock & Mark W. Watson, 2020. "Slack and Cyclically Sensitive Inflation," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 52(S2), pages 393-428, December.
    6. Philipp Baumann & Enzo Rossi & Alexander Volkmann, 2020. "What Drives Inflation and How: Evidence from Additive Mixed Models Selected by cAIC," Papers 2006.06274, arXiv.org.

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    More about this item

    Keywords

    Inflation; Phillips curve;

    JEL classification:

    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation

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