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Euro Area inflation: long-run determinants and short-run dynamics

  • Melisso Boschi

    ()

    (University of Essex)

  • Alessandro Girardi

    ()

    (ISAE - Institute for Studies and Economic Analyses)

This study adopts the long-run structural VAR approach to analyse the determinants of inflation in the Euro Area economy over the period 1985:1- 2003:2. Theoretical relationships link inflation to markup and output gap, respectively. The short-run dynamic properties of inflation are investigated using a structural VECM. Inflation is explained by a mixture of supply- and demandside factors, both in the long- and the short-run. Our simulation exercise indicates that a positive shock to inflation could have a favourable redistributional income effect on wage earners and non-detrimental consequences either on productivity and on competitiveness. Finally, the model produces satisfactory out-of-sample forecasts.

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Paper provided by ISTAT - Italian National Institute of Statistics - (Rome, ITALY) in its series ISAE Working Papers with number 60.

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Length: 41 pages
Date of creation: Dec 2005
Date of revision:
Handle: RePEc:isa:wpaper:60
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