Understanding Euro Area Inflation Dynamics: Why so Low for so Long?

26 Pages Posted: 1 Oct 2018

See all articles by Yasser Abdih

Yasser Abdih

International Monetary Fund (IMF)

Li Lin

International Monetary Fund (IMF)

Anne-Charlotte Paret

Banque de France

Date Written: August 2018

Abstract

Despite closing output gaps and tightening labor markets, inflation has remained low inthe euro area. Based on an augmented Phillips Curve framework, we find that thisphenomenon-sometimes attributed to low global inflation-has been primarily causedby a remarkable persistence of inflation, keeping it low despite the reduction in slack. Thisfeature is shown to be specific to the euro area (in comparison with the United States).Monetary policy needs to stay accommodative to help guide inflation back to target.

Keywords: Inflation, Inflation expectations, Inflation persistence, Monetary policy, Econometric models, Euro Area, Phillips curve, inflation persistence and expectations, General, Forecasting and Simulation, Monetary Policy (Targets, Instruments, and Effects)

JEL Classification: E10, E31, E32, E37, E52, C22, C50

Suggested Citation

Abdih, Yasser and Lin, Li and Paret, Anne-Charlotte, Understanding Euro Area Inflation Dynamics: Why so Low for so Long? (August 2018). IMF Working Paper No. 18/188. Available at SSRN: https://ssrn.com/abstract=3257354

Yasser Abdih (Contact Author)

International Monetary Fund (IMF) ( email )

700 19th Street, N.W.
Washington, DC 20431
United States

Li Lin

International Monetary Fund (IMF) ( email )

700 19th Street, N.W.
Washington, DC 20431
United States

Anne-Charlotte Paret

Banque de France ( email )

Paris
France

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