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Inflation and the Current Account in the Euro Area

Author

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  • Galstyan, Vahagn

    (Central Bank of Ireland)

Abstract

The euro area current account was on average in balance over 1999-2010 period, while the average rate of inflation was close to the ECB target. In contrast, the post-2011 increase in the euro area current account surplus has been accompanied by a period of low inflation. This paper suggests that observed low inflation can be partly explained by the surplus in the external balance. I propose a version of an open-economy inflation Phillips curve showing that, in addition to output gap and inflationary expectations, inflation is also shaped by the trade balance. At an empirical level, I find a statistically significant and negative correlation between the two variables.

Suggested Citation

  • Galstyan, Vahagn, 2019. "Inflation and the Current Account in the Euro Area," Economic Letters 4/EL/19, Central Bank of Ireland.
  • Handle: RePEc:cbi:ecolet:4/el/19
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    References listed on IDEAS

    as
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    7. Galstyan, Vahagn, 2019. "Factor Income and the Euro Area Current Account," Economic Letters 8/EL/19, Central Bank of Ireland.
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    11. Galstyan, Vahagn, 2019. "Understanding the Euro Area Current Account," Economic Letters 7/EL/19, Central Bank of Ireland.
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    Cited by:

    1. Consolo, Agostino & Koester, Gerrit & Nickel, Christiane & Porqueddu, Mario & Smets, Frank, 2021. "The need for an inflation buffer in the ECB’s price stability objective – the role of nominal rigidities and inflation differentials," Occasional Paper Series 279, European Central Bank.
    2. Fabian Eser & Peter Karadi & Philip R. Lane & Laura Moretti & Chiara Osbat, 2020. "The Phillips Curve at the ECB," Manchester School, University of Manchester, vol. 88(S1), pages 50-85, September.
    3. Galstyan, Vahagn, 2019. "Factor Income and the Euro Area Current Account," Economic Letters 8/EL/19, Central Bank of Ireland.
    4. Koester, Gerrit & Lis, Eliza & Nickel, Christiane & Osbat, Chiara & Smets, Frank, 2021. "Understanding low inflation in the euro area from 2013 to 2019: cyclical and structural drivers," Occasional Paper Series 280, European Central Bank.

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