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Missing Disinflation and Missing Inflation: A VAR Perspective

Author

Listed:
  • Elena Bobeica

    (European Central Bank)

  • Marek Jarociński

    (European Central Bank)

Abstract

In the immediate wake of the Great Recession we didn't see the disinflation that most models predicted and, subsequently, we didn't see the inflation they predicted. We show that these puzzles disappear in a vector autoregressive model that properly accounts for domestic and external factors. This model reveals strong spillovers from U.S. to euro-area inflation in the Great Recession. By contrast, domestic factors explain much of the euro-area inflation dynamics during the 2012-14 missing inflation episode. Consequently, euro-area economists and models that excessively focused on the global nature of inflation were liable to miss the contribution of deflationary domestic shocks in this period.

Suggested Citation

  • Elena Bobeica & Marek Jarociński, 2019. "Missing Disinflation and Missing Inflation: A VAR Perspective," International Journal of Central Banking, International Journal of Central Banking, vol. 15(1), pages 199-232, March.
    • Handle: RePEc:ijc:ijcjou:y:2019:q:1:a:5
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    JEL classification:

    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • F44 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - International Business Cycles

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