Explaining Irish Inflation During the Financial Crisis
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 inappro- priate 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 make a number of findings. First, the deflation in Ireland was unusual by domestic historical and international standards. Second, we find the short-run unemployment gap is the most appropriate way to measure slack in the domestic economy. Third, having controlled for international factors, there is a relationship between the domestic economy and inflation. Fourth, the relationship is not stable over time but seems to depend on the state of the business cycle. Fifth, these types of models predict the actual fall in inflation during the financial crisis quite well. We conclude that these results support the idea that inflation is not purely externally determined in Ireland.
|Date of creation:||Dec 2012|
|Date of revision:|
|Contact details of provider:|| Postal: P.O. Box No. 559, Dame Street, Dublin 2|
Phone: (01) 671 6666
Fax: (01) 671 6561
Web page: http://www.centralbank.ie
More information through EDIRC
References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Gordon, Robert J, 1996.
"The Time-varying NAIRU and its Implications for Economic Policy,"
CEPR Discussion Papers
1492, C.E.P.R. Discussion Papers.
- Robert J. Gordon, 1997. "The Time-Varying NAIRU and Its Implications for Economic Policy," Journal of Economic Perspectives, American Economic Association, vol. 11(1), pages 11-32, Winter.
- Robert J. Gordon, 1996. "The Time-Varying NAIRU and its Implications for Economic Policy," NBER Working Papers 5735, National Bureau of Economic Research, Inc.
- 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.
- Laurence M. Ball & Sandeep Mazumder, 2011.
"Inflation Dynamics and the Great Recession,"
NBER Working Papers
17044, National Bureau of Economic Research, Inc.
- Sandeep Mazumder & Laurence M. Ball, 2011. "Inflation Dynamics and the Great Recession," IMF Working Papers 11/121, International Monetary Fund.
- Laurence Ball & Sandeep Mazumder, 2011. "Inflation Dynamics and the Great Recession," Economics Working Paper Archive 580, The Johns Hopkins University,Department of Economics.
- 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.
- 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.
When requesting a correction, please mention this item's handle: RePEc:cbi:wpaper:09/rt/12. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Richard Smith)
If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.
If references are entirely missing, you can add them using this form.
If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.
If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.
Please note that corrections may take a couple of weeks to filter through the various RePEc services.