Skip to main content
Log in

Euro area inflation persistence

  • Original Paper
  • Published:
Empirical Economics Aims and scope Submit manuscript

Abstract

This paper presents evidence on the lag between monetary policy actions and the response of inflation in the euro area as a whole as well as in some of its core countries, notably Germany, Italy and France. In line with previous findings for the US and the UK, results here show that it takes over a year before monetary policy actions have their maximum effect on inflation both in the euro area and in individual countries and that a lag of this length has existed in Europe at least since the collapse of the Bretton Woods system, despite the numerous changes in European monetary policy regime thereafter. Results based on alternative definitions of inflation persistence support these findings and indicate, if any, that transmission lags could be in fact much longer for individual countries and the euro area as a whole, although, at the country level, there is strong evidence over time of a drop in German inflation persistence and a sizeable shift in the mean of inflation – particularly in Italy and France. An examination based on results from this paper reveals that euro area inflation persistence could well be an intrinsic phenomenon rather than a ‘statistical fluke’ due to aggregation.

This is a preview of subscription content, log in via an institution to check access.

Access this article

Price excludes VAT (USA)
Tax calculation will be finalised during checkout.

Instant access to the full article PDF.

Institutional subscriptions

Similar content being viewed by others

References

  • Angeloni I, Dedola L (1999) From the ERM to the euro: new evidence on economic and policy convergence among EU countries, ECB working paper no. 4

  • Angeloni I, Kashyap A, Mojon B, Terlizzese D (2001) Monetary transmission in the Euro area: where do we stand?, ECB working paper no. 114

  • Artus P, Avouyi-Dovi S, Blenze E, Lecointe F (1991) Transmission of US monetary policy to Europe and asymmetry in the European monetary system. Eur Econ Rev 35(7):1369–1384

    Article  Google Scholar 

  • Batini N, Jackson B, Nickell S (2000) Inflation dynamics and the labour share in the UK, Bank of England, external MPC unit discussion paper no. 2

  • Batini N, Nelson E (2001) The lag from monetary policy actions to inflation: Friedman revisited. Int Fin 4(3):381–400

    Article  Google Scholar 

  • Christiano LJ, Eichenbaum M, Evans CL (2001) Nominal rigidities and the dynamic effects of a shock to monetary policy, NBER working paper no. 8403

  • Clarida R, Galí J, Gertler M (1998) Monetary policy rules in practice: some international evidence. Eur Econ Rev 42(6):1033–1067

    Article  Google Scholar 

  • Clarida R, Galí J, Gertler M (2000) Monetary policy rules and macroeconomic stability: evidence and some theory. Q J Econ 115(1):147–180

    Article  Google Scholar 

  • Coenen G (2002) Inflation persistence and robust monetary policy design. European Central Bank, mimeo

    Google Scholar 

  • Coenen G, Vega JL (2001) The demand for M3 in the Euro area. J Appl Econ 16(6):727–748

    Article  Google Scholar 

  • Coenen G, Wieland V (2000) A small estimated euro area model with rational expectations and nominal rigidities, ECB working paper no. 30

  • Coenen G, Wieland V (2002) Inflation dynamics and international linkages: a model of the United States, the Euro area and Japan. In: Paper presented at the international research forum on monetary policy, European Central Bank, 5–6 July 2002

  • Cogley T, Sargent TJ (2001) Evolving post-world war II inflation dynamics, NBER Macroeconomics Annual, 16

  • European Central Bank, Monthly Bulletin, various issues (January 1999, July 2000, May 2001)

  • Erceg CJ, Levin AT (2001) Imperfect information and inflation persistence, Finance and Economics Discussion Paper 2001–2045, Federal Reserve Board

  • Fagan G, Henry J (1998) Long run money demand in the EU: evidence for area-wide aggregates. Empirical Econ 23(3):483–506

    Article  Google Scholar 

  • Fagan G, Henry J, Mestre R (2001) An area-wide model (AWM) for the euro area. ECB working paper no. 42

  • Favero CA, Giavazzi F, Spaventa L (1997) High yields: the spread on German interest rates. Econ J 107(443):956–985

    Article  Google Scholar 

  • Friedman M (1972) Have monetary policies failed? Am Econ Rev (Pap Proc) 62:11–18

    Google Scholar 

  • Friedman M, Schwartz AJ (1982) Monetary trends in the United States and the United Kingdom: their relation to income, prices, and interest rates, 1867–1975. University of Chicago Press, Chicago

  • Fuhrer JC, Moore GR (1995) Inflation persistence. Q J Econ 110:127–159

    Article  Google Scholar 

  • Galí J, Gertler M (1999) Inflation dynamics: a structural econometric analysis. J Monet Econ 44:195–222

    Article  Google Scholar 

  • Galí J, Gertler M, López-Salido JD (2000) European inflation dynamics. Eur Econ Rev 45(7):1237–1270

    Article  Google Scholar 

  • Gerlach S, Svensson LEO (2001) Money and inflation in the Euro area: a case for monetary indicators? BIS working paper no. 98

  • Giavazzi F, Spaventa L (1990) Il nuovo SME (con un poscritto) (With English summary). Politica Econ 6(3):417–447

    Google Scholar 

  • Granger CWJ (1980) Long memory relationships and the aggregation of dynamic Models. J Econ 14(2):227–238

    Google Scholar 

  • Issing O (1997) Monetary targeting in Germany: the stability of monetary policy and of the monetary system. J Monet Econ 39(1):67–79

    Article  Google Scholar 

  • Issing O, Gaspar V, Angeloni I, Tristani O (2001) Monetary Policy in the Euro Area. Cambridge University Press, Cambridge

    Google Scholar 

  • Jondeau E, Le Bihan H (2001) Testing for a forward-looking Phillips curve. Additional Evidence from European and US data, Banque de France. Notes d’Etudes et de Recherche #86

  • McAdam P, Willman A (2002) New Keynesian Phillips curves: a re-assessment based on Euro area data. European Central Bank, mimeo

    Google Scholar 

  • McCallum BT (1999) An interview with Robert E. Lucas, Jr. Macroecon Dynam 3:278–291

    Article  Google Scholar 

  • McConnell MM, Perez-Quiroz (2000) Output fluctuations in the United States: What has changed since the early 1980s? Am Econ Rev 90(5):1464–1476

    Article  Google Scholar 

  • Mojon B (1999) Monetary policy under a quasi-fixed exhange rate regime. The case of France Between 1987 and 1996. Banca Nazionale del Lavoro Q Rev 211:401–430

    Google Scholar 

  • Monticelli C, Tristani O (1999) What does the single monetary policy do? A SVAR benchmark for the European Central Bank. ECB working paper no.2

  • Nicoletti Altimari S (2001) Does money lead inflation in the euro area? ECB working paper no. 63

  • Passacantando F (1996) Building and institutional framework for monetary stability: the case of Italy (1979–1994). Banca Nazionale del Lavoro Q Rev 49(196):83–132

    Google Scholar 

  • Rotemberg JJ, Woodford M (1997) An optimization-based econometric framework for the evaluation of monetary policy. NBER Macroecon Annual 12:297–346

    Google Scholar 

  • Rudd J, Whelan K (2001) New tests for the New Keynesian Phillips Curve. Federal Reserve Board, Finance and economics discussion series 2001–2030

  • Rudebusch GD, Svensson LEO (2002) Eurosystem monetary targeting: lessons from U.S. data. Eur Econ Rev 46(3):417–442

    Article  Google Scholar 

  • Sbordone AM (2002) Prices and unit labor costs: a new test of price stickiness. J Monet Econ 49:265–292

    Article  Google Scholar 

  • Sims CA (2001) Comment on Cogley T, Sargent TJ (2001) Evolving post-world war II inflation dynamics. NBER Macroecon Annual 16:373–379

    Google Scholar 

  • Sims CA, Zha T (2002) Macroeconomic switching. Princeton University, Discussion paper. http://www.princeton.edu/∼sims/

  • Smets F, Wouters R (2002) An estimated stochastic general equilibrium model of the Euro area. ECB working paper no. 171

  • Trecroci C, Vega JL (2000) The information content of M3 for future inflation. ECB working paper no. 33

  • Woodford M (1998) Comment on John Cochrane, a frictionless view of U.S. inflation. NBER Macroecon Annual 13:390–418

    Google Scholar 

  • Woodford M (2001) The Taylor rule and optimal monetary policy. Am Econ Rev 91(2):232–237

    Article  Google Scholar 

Download references

Author information

Authors and Affiliations

Authors

Corresponding author

Correspondence to Nicoletta Batini.

Additional information

This research was conducted during my visit at the European Central Bank Directorate Research, as part of the Research Visitor Programme. I would like to thank Anna Maria Agresti for providing individual country data from the macroeconomic database of the Monetary Transmission Network; Alistair Dieppe for providing data from the ECB area-wide model dataset; and Michele Manna for supplying me with the area-wide M3 data for the period 1970–1980. I thank Gabriel Fagan, Frank Smets, Ignazio Angeloni, Vítor Gaspar, Michael Ehrmann, Guenter Coenen, Oreste Tristani, Tommaso Monacelli, Stephanie Schmitt-Grohe and Gerhard Ruenstler for helpful discussions during my stay at the ECB. I would also like to thank seminar participants at the ECB for their input and I am very grateful to Jeffrey Fuhrer, Edward Nelson and Kenneth West, Bernd Fitzenberger and two anonymous referees for comments on an earlier draft. Any errors and omissions are mine. The views expressed in this paper are those of the author and should not be attributed to the International Monetary Fund, its Executive Board, or its management

Rights and permissions

Reprints and permissions

About this article

Cite this article

Batini, N. Euro area inflation persistence. Empirical Economics 31, 977–1002 (2006). https://doi.org/10.1007/s00181-006-0064-7

Download citation

  • Received:

  • Accepted:

  • Published:

  • Issue Date:

  • DOI: https://doi.org/10.1007/s00181-006-0064-7

Keywords

JEL Classification Codes

Navigation