Exploring Trend Inflation Dynamics in Euro Area Countries

51 Pages Posted: 28 Mar 2019 Last revised: 17 Jul 2019

See all articles by Mónica Correa-López

Mónica Correa-López

Banco de España

Matias Pacce

Banco de España

Kathi Schlepper

Deutsche Bundesbank; Goethe University Frankfurt

Date Written: March 27, 2019

Abstract

This paper analyzes the inflation processes of twelve Euro Area countries over the period 1984:q1-2017:q4. The stylized features of inflation uncover its changing nature and cross-country heterogeneity, in terms of mean, volatility and persistence. After estimation of a wide array of unobserved components models, we isolate trend inflation rates in a framework that allows for time-varying inflation gap persistence and stochastic volatility in both the trend and transitory components. On average, a sizeable share of overall inflation dynamics is accounted for by movements in the trend. In explaining trend dynamics, we consistently find a significant role for short-term inflation expectations, economic slack, and openness variables. However, the accumulated impacts of these are fairly small, except in certain, sustained episodes. This is of policy relevance since the monetary authority might want to respond to shocks that are prone to affect the inflation trend in order to ensure that long-term inflation expectations remain anchored.

Keywords: trend inflation, inflation dynamics, UCSV models, monetary policy

JEL Classification: E31, E52

Suggested Citation

Correa-López, Mónica and Pacce, Matias and Schlepper, Kathi, Exploring Trend Inflation Dynamics in Euro Area Countries (March 27, 2019). Banco de Espana Working Paper No. 1909 (2019), Available at SSRN: https://ssrn.com/abstract=3361024 or http://dx.doi.org/10.2139/ssrn.3361024

Mónica Correa-López (Contact Author)

Banco de España ( email )

Alcala 50
28014 Madrid
Spain

Matias Pacce

Banco de España ( email )

Alcala 50
Madrid 28014
Spain

Kathi Schlepper

Deutsche Bundesbank ( email )

Wilhelm-Epstein-Str. 14
Frankfurt/Main, 60431
Germany

Goethe University Frankfurt ( email )

Grüneburgplatz 1
Frankfurt am Main, 60323
Germany

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