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The Risk of Inflation Dispersion in the Euro Area

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  • St phane Lhuissier
  • Aymeric Ortmans
  • Fabien Tripier

Abstract

We introduce an approach to measure the risk of inflation dispersion among euro area countries. Our measure reflects the dissimilarity between the full predictive inflation distributions of member countries, and thus captures how "far" apart inflation levels are expected to be. The risk of inflation dispersion exhibits a countercyclical behavior along the business cycle. We document that the rising risk of inflation dispersion is mainly driven by a deterioration in financial conditions, while a robust anchoring of inflation expectations in each country tends to mitigate this risk. We further demonstrate that our measure has predictive power for future euro area inflation realizations as well as for variations in the monetary authority's interest rate.

Suggested Citation

  • St phane Lhuissier & Aymeric Ortmans & Fabien Tripier, 2024. "The Risk of Inflation Dispersion in the Euro Area," Working papers 954, Banque de France.
    • Handle: RePEc:bfr:banfra:954
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    More about this item

    Keywords

    Inflation Dispersion; Kullback-Leibler; Euro area; Quantile Regression; Phillips Curve;
    All these keywords.

    JEL classification:

    • D80 - Microeconomics - - Information, Knowledge, and Uncertainty - - - General
    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
    • F45 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Macroeconomic Issues of Monetary Unions
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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