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Weakness in Italy�s core inflation and the Phillips curve: the role of labour and financial indicators

Author

Listed:
  • Antonio M. Conti

    (Bank of Italy)

  • Concetta Gigante

    (University of Exeter)

Abstract

We investigate the dynamics of core inflation in Italy, with a special focus on the period of low inflation after 2014, through the lenses of a Phillips curve framework. Composite indicators of the Italian labour and financial market are constructed and included into a Phillips curve. A number of results emerges from the empirical analysis. First, a statistically significant trade-off between core inflation and economic activity is observed, especially when measures of slack are derived from labour market variables. Second, financial indicators can help to better characterize the dynamics of core inflation. Third, when controlling for financial indicators the slope of the Phillips curve turns out to be smaller, except for the case in which it is measured by the measure of slack based on broad labour market conditions. Fourth, a steepening in the Phillips curve emerges in the aftermath of the Global Financial Crisis, while a stabilization is evident at the end of the sample. Fifth, non-linear techniques suggest that weakness in core inflation may be dependent on the level of labour market tightness and of trend inflation especially. These findings have non-negligible implications for modeling and forecasting inflation dynamics in Italy.

Suggested Citation

  • 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.
    • Handle: RePEc:bdi:opques:qef_466_18
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    Cited by:

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    3. Yhlas SOVBETOV, 2019. "Phillips Curve Estimation During Tranquil and Recessionary Periods: Evidence From Panel Analysis," Istanbul Journal of Economics-Istanbul Iktisat Dergisi, Istanbul University, Faculty of Economics, vol. 69(1), pages 23-41, June.

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    More about this item

    Keywords

    low inflation; Phillips curve; labour markets; financial stress; time variation;
    All these keywords.

    JEL classification:

    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E50 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - General

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