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Explaining Irish Inflation during the Financial Crisis

  • Bermingham, Colin

    (Central Bank of Ireland)

  • Coates, Dermot

    (Central Bank of Ireland)

  • Larkin, John

    (Central Bank of Ireland)

  • O'Brien, Derry

    (Central Bank of Ireland)

  • O'Reilly, Gerard

    (Central Bank of Ireland)

The recent financial crisis resulted in a steep contraction in the domestic economy together with a sharp decline in inflation. The Phillips curve model of inflation argues that inflation should be negatively related to economic performance and this would seem to be a potential explanatory factor in the behaviour of Irish inflation during the financial crisis. However, Ireland is a very open economy and the Phillips curve has been criticised as an inappropriate model of inflation for Ireland on the basis that inflation is primarily imported from abroad with little role for domestic factors. We formally assess what role domestic economic activity has on inflation in Ireland. We find that while external factors are important in terms of explaining Irish inflation, there are episodes when the domestic economy has an important influence on inflation. In addition, our preferred Phillips curve model predicts actual Irish inflation during the financial crisis quite accurately.

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Paper provided by Central Bank of Ireland in its series Economic Letters with number 13/EL/12.

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Date of creation: Dec 2012
Date of revision:
Handle: RePEc:cbi:ecolet:13/el/12
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  1. Gordon, Robert J, 1996. "The Time-varying NAIRU and its Implications for Economic Policy," CEPR Discussion Papers 1492, C.E.P.R. Discussion Papers.
  2. Laurence Ball & Sandeep Mazumder, 2011. "Inflation Dynamics and the Great Recession," Economics Working Paper Archive 580, The Johns Hopkins University,Department of Economics.
  3. Robert J. Gordon, 1998. "Foundations of the Goldilocks Economy: Supply Shocks and the Time-Varying NAIRU," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 29(2), pages 297-346.
  4. Kenny, Geoff & McGettigan, Donal, 1999. "Modelling Traded, Non-traded and Aggregate Inflation in a Small Open Economy: The Case of Ireland," Manchester School, University of Manchester, vol. 67(1), pages 60-88, January.
  5. Alan B. Krueger & Andreas Mueller, 2011. "Job Search, Emotional Well-Being and Job Finding in a Period of Mass Unemployment: Evidence from High-Frequency Longitudinal Data," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 42(1 (Spring), pages 1-81.
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