Euro Area Inflation: Long-Run Determinants and Short-Run Dynamics

41 Pages Posted: 18 Apr 2005

See all articles by Melisso Boschi

Melisso Boschi

Centre for Applied Macroeconomic Analysis (CAMA)

Alessandro Girardi

National Institute of Statistics (ISTAT)

Date Written: December 2005

Abstract

This study adopts the long-run structural VAR approach to analyse the determinants of inflation in the Euro Area economy over the period 1985:1-2003:2. Theoretical relationships link inflation to markup and output gap, respectively. The short-run dynamic properties of inflation are investigated using a structural VECM. Inflation is explained by a mixture of supply- and demand-side factors, both in the long- and the short-run. Our simulation exercise indicates that a positive shock to inflation could have a favourable re-distributional income effect on workers and non-detrimental consequences either on productivity and on competitiveness. Finally, the model produces satisfactory out-of-sample forecasts.

Keywords: Inflation, markup, Euro Area, long-run structural VARs, subset VECM, impulse response analysis, forecasting

JEL Classification: C32, E00, E31, E37

Suggested Citation

Boschi, Melisso and Girardi, Alessandro, Euro Area Inflation: Long-Run Determinants and Short-Run Dynamics (December 2005). ISAE Working Paper No. 60, Available at SSRN: https://ssrn.com/abstract=698741 or http://dx.doi.org/10.2139/ssrn.698741

Melisso Boschi

Centre for Applied Macroeconomic Analysis (CAMA) ( email )

ANU College of Business and Economics
Canberra, Australian Capital Territory 0200
Australia

Alessandro Girardi (Contact Author)

National Institute of Statistics (ISTAT) ( email )

Via Cesare Balbo 16
00184 Rome, 0185
Italy

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