, Volume 31, Issue 4, pp 977-1002

Euro area inflation persistence

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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 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