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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

    as
    1. Galstyan, Vahagn, 2019. "Understanding the Euro Area Current Account," Economic Letters 7/EL/19, Central Bank of Ireland.
    2. Jordi Galí & Tommaso Monacelli, 2005. "Monetary Policy and Exchange Rate Volatility in a Small Open Economy," Review of Economic Studies, Oxford University Press, vol. 72(3), pages 707-734.
    3. Gali, Jordi & Gertler, Mark, 1999. "Inflation dynamics: A structural econometric analysis," Journal of Monetary Economics, Elsevier, vol. 44(2), pages 195-222, October.
    4. Olivier Blanchard, 2018. "Should We Reject the Natural Rate Hypothesis?," Journal of Economic Perspectives, American Economic Association, vol. 32(1), pages 97-120, Winter.
    5. N. Gregory Mankiw & Ricardo Reis, 2002. "Sticky Information versus Sticky Prices: A Proposal to Replace the New Keynesian Phillips Curve," The Quarterly Journal of Economics, Oxford University Press, vol. 117(4), pages 1295-1328.
    6. Olivier Blanchard & Eugenio Cerutti & Lawrence Summers, 2015. "Inflation and Activity – Two Explorations and their Monetary Policy Implications," NBER Working Papers 21726, National Bureau of Economic Research, Inc.
    7. Mark Gertler & John Leahy, 2008. "A Phillips Curve with an Ss Foundation," Journal of Political Economy, University of Chicago Press, vol. 116(3), pages 533-572, June.
    8. Temin, Peter & Vines, David, 2014. "Keynes: Useful Economics for the World Economy," MIT Press Books, The MIT Press, edition 1, volume 1, number 026202831x, March.
    9. Rotemberg, Julio J, 1982. "Sticky Prices in the United States," Journal of Political Economy, University of Chicago Press, vol. 90(6), pages 1187-1211, December.
    10. Galstyan, Vahagn, 2019. "Factor Income and the Euro Area Current Account," Economic Letters 8/EL/19, Central Bank of Ireland.
    11. Pesaran, M. Hashem & Smith, Ron P., 2014. "Signs of impact effects in time series regression models," Economics Letters, Elsevier, vol. 122(2), pages 150-153.
    12. Galí, Jordi & Gertler, Mark, 1999. "Inflation Dynamics: A Structural Economic Analysis," CEPR Discussion Papers 2246, C.E.P.R. Discussion Papers.
    13. Calvo, Guillermo A., 1983. "Staggered prices in a utility-maximizing framework," Journal of Monetary Economics, Elsevier, vol. 12(3), pages 383-398, September.
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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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