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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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    File URL: https://www.centralbank.ie/docs/default-source/publications/economic-letters/vol-2019-no-4-inflation-and-the-current-account-in-the-euro-area-(galstyan).pdf?sfvrsn=6
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    References listed on IDEAS

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    Cited by:

    1. Galstyan, Vahagn, 2023. "Understanding the Joint Dynamics of Inflation and Wage Growth in the Euro Area," Research Technical Papers 11/RT/23, Central Bank of Ireland.
    2. 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.
    3. 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.
    4. Schuler, Tobias & Sun, Yiqiao, 2022. "The current account and monetary policy in the euro area," Working Paper Series 2696, European Central Bank.
    5. Kabundi, Alain & De Simone, Francisco Nadal, 2022. "Euro area banking and monetary policy shocks in the QE era," Journal of Financial Stability, Elsevier, vol. 63(C).
    6. Galstyan, Vahagn, 2019. "Factor Income and the Euro Area Current Account," Economic Letters 8/EL/19, Central Bank of Ireland.
    7. Guillochon, Justine & Le Roux, Julien, 2023. "Unobserved components model(s): output gaps and financial cycles," Working Paper Series 2832, European Central Bank.
    8. 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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