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Understanding Euro Area Inflation Dynamics: Why So Low for So Long?

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  • Yasser Abdih
  • Li Lin
  • Anne-Charlotte Paret

Abstract

Despite closing output gaps and tightening labor markets, inflation has remained low in the euro area. Based on an augmented Phillips Curve framework, we find that this phenomenon—sometimes attributed to low global inflation—has been primarily caused by a remarkable persistence of inflation, keeping it low despite the reduction in slack. This feature is shown to be specific to the euro area (in comparison with the United States). Monetary policy needs to stay accommodative to help guide inflation back to target.

Suggested Citation

  • Yasser Abdih & Li Lin & Anne-Charlotte Paret, 2018. "Understanding Euro Area Inflation Dynamics: Why So Low for So Long?," IMF Working Papers 18/188, International Monetary Fund.
  • Handle: RePEc:imf:imfwpa:18/188
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    References listed on IDEAS

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    1. Magdalena Grothe & Aidan Meyler, 2018. "Inflation Forecasts: Are Market-Based and Survey-Based Measures Informative?," International Journal of Financial Research, International Journal of Financial Research, Sciedu Press, vol. 9(1), pages 171-188, January.
    2. Gali, Jordi & Gertler, Mark, 1999. "Inflation dynamics: A structural econometric analysis," Journal of Monetary Economics, Elsevier, vol. 44(2), pages 195-222, October.
    3. Olivier Coibion & Yuriy Gorodnichenko & Saten Kumar, 2018. "How Do Firms Form Their Expectations? New Survey Evidence," American Economic Review, American Economic Association, vol. 108(9), pages 2671-2713, September.
    4. Fuhrer, Jeffrey C, 1997. "The (Un)Importance of Forward-Looking Behavior in Price Specifications," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 29(3), pages 338-350, August.
    5. Yasser Abdih & Ravi Balakrishnan & Baoping Shang, 2016. "What is Keeping U.S. Core Inflation Low; Insights from a Bottom-Up Approach," IMF Working Papers 16/124, International Monetary Fund.
    6. Irina Bunda, 2007. "The Changing Role of the Exchange Rate in a Globalised Economy," Post-Print halshs-00372820, HAL.
    7. Galí, Jordi & Gertler, Mark, 1999. "Inflation Dynamics: A Structural Economic Analysis," CEPR Discussion Papers 2246, C.E.P.R. Discussion Papers.
    8. Luis J. Álvarez & Emmanuel Dhyne & Marco Hoeberichts & Claudia Kwapil & Hervé Le Bihan & Patrick Lünnemann & Fernando Martins & Roberto Sabbatini & Harald Stahl & Philip Vermeulen & Jouko Vilmunen, 2006. "Sticky Prices in the Euro Area: A Summary of New Micro-Evidence," Journal of the European Economic Association, MIT Press, vol. 4(2-3), pages 575-584, 04-05.
    9. Laurence M. Ball, 2006. "Has Globalization Changed Inflation?," NBER Working Papers 12687, National Bureau of Economic Research, Inc.
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    Citations

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    Cited by:

    1. Alvar Kangur & Koralai Kirabaeva & Jean-Marc Natal & Simon Voigts, 2019. "How Informative Are Real Time Output Gap Estimates in Europe?," IMF Working Papers 19/200, International Monetary Fund.
    2. Christian Pfister & Jean-Guillaume Sahuc, 2020. "Unconventional monetary policies: A stock-taking exercise," Revue d'économie politique, Dalloz, vol. 130(2), pages 137-169.
    3. Lasha Arevadze & Tamta Sopromadze & Giorgi Tsutskiridze & Shalva Mkhatrishvili, 2020. "Identifying the Phillips Curve in Georgia," NBG Working Papers 01/2020, National Bank of Georgia.
    4. Yuanyan Sophia Zhang, 2019. "European Wage Dynamics and Spillovers," IMF Working Papers 19/156, International Monetary Fund.
    5. Dennis Bonam & Gabriele Galati & Irma Hindrayanto & Marco Hoeberichts & Anna Samarina & Irina Stanga, 2019. "Inflation in the euro area since the Global Financial Crisis," DNB Occasional Studies 1703, Netherlands Central Bank, Research Department.
    6. Vizhdan Boranova & Raju Huidrom & Sylwia Nowak & Petia Topalova & Volodymyr Tulin & Richard Varghese, 2019. "Wage Growth and Inflation in Europe: A Puzzle?," IMF Working Papers 19/280, International Monetary Fund.
    7. Balazs Csonto & Yuxuan Huang & Camilo E Tovar Mora, 2019. "Is Digitalization Driving Domestic Inflation?," IMF Working Papers 19/271, International Monetary Fund.

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