Modelling Inflation in the Euro Area

57 Pages Posted: 16 May 2004

See all articles by Eilev S. Jansen

Eilev S. Jansen

Norges Bank - Research Department; Statistics Norway

Date Written: March 2004


The paper presents an incomplete competition model (ICM), where inflation is determined jointly with unit labour cost growth. The ICM is estimated on data for the Euro area and evaluated against existing models, i.e. the implicit inflation equation of the Area Wide model (AWM) - cf. Fagan, Henry and Mestre (2001) - and estimated versions of the (single equation) P* model and a hybrid New Keynesian Phillips curve.

The evidence from these comparisons does not invite decisive conclusions. There is, however, some support in favour of the (reduced form) AWM inflation equation. It is the only model that encompasses a general unrestricted model and it forecast encompasses the competitors when tested on 20 quarters of one step ahead forecasts.

Keywords: Inflation, incomplete competition model, Area Wide model, P*-model, New Keynesian Phillips curve, model evaluation, forecast encompassing

JEL Classification: C22, C32, C52, C53, E31

Suggested Citation

Jansen, Eilev Sandvik and Jansen, Eilev Sandvik, Modelling Inflation in the Euro Area (March 2004). Available at SSRN: or

Eilev Sandvik Jansen (Contact Author)

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Norges Bank - Research Department ( email )

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