Low Inflation in the Euro Area: Causes and Consequences

89 Pages Posted: 3 Feb 2017

See all articles by Matteo Ciccarelli

Matteo Ciccarelli

European Central Bank (ECB)

Chiara Osbat

European Central Bank (ECB)

Elena Bobeica

European Central Bank (ECB)

Caroline Jardet

Banque de France

Marek Jarocinski

European Central Bank (ECB)

Caterina Mendicino

Bank of Portugal; European Central Bank (ECB) - Directorate General Research

Alessandro Notarpietro

Bank of Italy

Sergio Santoro

Bank of Italy

Arnoud Stevens

National Bank of Belgium

Date Written: January 25, 2017

Abstract

After 2012, inflation has been unexpectedly low across much of the developed world and economists speak of a “missing inflation” puzzle, namely inflation was expected to be higher on the back of an ongoing recovery. This paper investigates the causes and consequences of low inflation in the euro area after 2012 and analyses whether monetary policy has been successful in dampening the risks associated to low inflation. The paper finds that the missing inflation was primarily due to cyclical factors – domestic in the earlier part of the period and global in the latter part – and that the Phillips curve remains a useful tool in understanding inflation dynamics over the period of interest. The succession of negative shocks constrained headline inflation for a prolonged period, and there is evidence of an increase in the persistence of inflation and a fall in the trend inflation rate, which had begun to have a greater influence on longer-term inflation expectations. This may have signaled uncertainty over the effectiveness of unconventional monetary policy measures, but public belief in the ECB’s commitment to keep the annual rate of HICP inflation below but close to 2% has remained intact. The paper concludes that unconventional monetary policy measures are effective in mitigating the downside risks to price stability, curtailing risks of de-anchoring, and expanding aggregate demand.

Keywords: low inflation, Phillips curve, inflation expectations, unconventional monetary policy

JEL Classification: E31, E52, E58

Suggested Citation

Ciccarelli, Matteo and Osbat, Chiara and Bobeica, Elena and Jardet, Caroline and Jarocinski, Marek and Mendicino, Caterina and Notarpietro, Alessandro and Santoro, Sergio and Stevens, Arnoud, Low Inflation in the Euro Area: Causes and Consequences (January 25, 2017). ECB Occasional Paper No. 181. Available at SSRN: https://ssrn.com/abstract=2910978

Matteo Ciccarelli (Contact Author)

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany

Chiara Osbat

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany
+49 69 1344 6821 (Phone)
+49 69 1344 6000 (Fax)

Elena Bobeica

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany

Caroline Jardet

Banque de France ( email )

31 rue croix des petits champs
75049 Paris Cedex 01
France

Marek Jarocinski

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany
+49 69 1344 6414 (Phone)

Caterina Mendicino

Bank of Portugal ( email )

Rua Francisco Ribeiro, 2
Lisbon, 1150-165
Portugal

European Central Bank (ECB) - Directorate General Research ( email )

Kaiserstrasse 29
D-60311 Frankfurt am Main
Germany

Alessandro Notarpietro

Bank of Italy ( email )

Via Nazionale 91
Rome, 00184
Italy

Sergio Santoro

Bank of Italy ( email )

Via Nazionale 91
Rome, 00184
Italy

Arnoud Stevens

National Bank of Belgium ( email )

Brussels, B-1000
Belgium

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