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Is euro area lowflation here to stay ? Insights from a time-varying parameter model with survey data

Author

Listed:
  • Arnoud Stevens

    () (National Bank of Belgium)

  • Joris Wauters

    () (National Bank of Belgium and Ghent University)

Abstract

Inflation has been persistently weak in the euro area despite the economic recovery since 2013. We investigate the sources behind this protracted low inflation by building a time-varying parameter model that jointly explains the dynamics of inflation and inflation expectations from the ECB’s Survey of Professional Forecasters. We find that the inclusion of survey data strengthens the view that low inflation was mainly due to cyclical drivers. In particular, the model with survey expectations finds a more muted decline of trend inflation in recent years and a larger degree of economic slack. The impact of economic slack and import prices on inflation is found to have increased in recent years. We also find that survey expectations have become less persistent over the financial crisis period, and that including survey data improves the model’s out-of-sample forecasting performance.

Suggested Citation

  • Arnoud Stevens & Joris Wauters, 2018. "Is euro area lowflation here to stay ? Insights from a time-varying parameter model with survey data," Working Paper Research 355, National Bank of Belgium.
  • Handle: RePEc:nbb:reswpp:201810-355
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    File URL: https://www.nbb.be/doc/oc/repec/reswpp/wp355en.pdf
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    References listed on IDEAS

    as
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    More about this item

    Keywords

    in?ation dynamics; trend in?ation; survey-based in?ation expectations; ECB Survey of Pro- fessional Forecasters; nonlinear state space model; Bayesian estimation; euro area;

    JEL classification:

    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • C11 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Bayesian Analysis: General
    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models

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