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Has Euro-area inflation persistence changed over time?

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  • Gerard O'Reilly
  • Karl Whelan

Abstract

This paper analyzes the stability over time of the econometric process for euro-area inflation since 1970, focusing in particular on the behavior of the so-called persistence parameter (the sum of the coefficients on the lagged dependent variables). Perhaps surprisingly, in light of the Lucas critique, our principal finding is that there appears to be relatively little instability in the parameters of the euro-area inflation process. Full-sample estimates of the persistence parameter are generally close to 1, and we fail to reject the hypothesis that this parameter has been stable over time. We discuss how these results provide some indirect evidence against rational expectations models with strong forward-looking elements, such as the New Keynesian Phillips curve.

Suggested Citation

  • Gerard O'Reilly & Karl Whelan, 2005. "Has Euro-area inflation persistence changed over time?," Open Access publications 10197/211, School of Economics, University College Dublin.
    • Handle: RePEc:ucn:oapubs:10197/211
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    File URL: http://hdl.handle.net/10197/211
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    More about this item

    Keywords

    Inflation (Finance)--Europe; Rational expectations (Economic theory); Inflation (Finance)--Mathematical models;
    All these keywords.

    JEL classification:

    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy

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