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Inflation and the Current Account in the Euro Area

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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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    1. Galstyan, Vahagn, 2019. "Factor Income and the Euro Area Current Account," Economic Letters 8/EL/19, Central Bank of Ireland.

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