Are Non-Euro Area EU Countries Importing Low Inflation from the Euro Area?
35 Pages Posted: 22 Nov 2014
Date Written: October 2014
The synchronized disinflation across Europe since end-2011 raises the question of whether non-euro area EU countries are affected by the undershooting of the euro area inflation target. To shed light on this issue, we estimate an open-economy, New Keynsian Phillips curve, in which we control for imported inflation. Regression results suggest that falling food and energy prices have been the main disinflationary driver. But low core inflation in the euro area has also had a clear and significant impact. Countries with more rigid exchange-rate regimes and higher share of foreign value added in domestic demand have been more affected. The scope for monetary response to low inflation in non-euro area EU countries depends on concerns about financial stability and unanchoring of inflationary expectations, as well as on exchange rate regime and capital flows dynamics.
Keywords: Disinflation, Europe, Euro Area, Inflation targeting, Open economies, Econometric models, Central and Eastern Europe, Sweden, United Kingdom, Denmark, monetary policy, inflationary expectations, monetary fund, central bank, low inflation, national bank, inflation-targeting, annual inflation, inflation rates, effective exchange rates, financial stability, price inflation, inflation forecasts, aggregate demand, inflationary pressures, foreign exchange, monetary economics, inflation dynamics, monetary policies, monetary response, monetary conditions, expectations of inflation, monetary policy regime, actual inflation, monetary autonomy, price level, post-crisis period, real interest rates, pric
JEL Classification: E12, E31, E58
Suggested Citation: Suggested Citation