Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/153791
Authors: 
Benkovskis, Konstantins
Caivano, Michele
D’Agostino, Antonello
Dieppe, Alistair
Hurtado, Samuel
Karlsson, Tohmas
Ortega, Eva
Várnai, Tímea
Year of Publication: 
2011
Series/Report no.: 
ECB Working Paper 1357
Abstract: 
A number of academic studies suggest that from the mid-1990s onwards there were changes in the link between inflation and economic activity. However, it remains unclear the extent to which this phenomenon can be ascribed to a change in the structural relationship between inflation and output, as opposed to a change in the size and nature of the shocks hitting the economy. This paper uses a suite of models, such as time-varying VAR techniques, traditional macro models, as well as DSGE models, to investigate, for various European countries as well as for the euro area, the evolution of the link between inflation and resource utilization and its dependence on the nature and size of the shocks. Our analysis suggests that the relationship between inflation and activity has indeed been changing over time, while remaining positive, with the correlation peaking during recessions. Quantitatively, the link between output and inflation is found to be highly dependent on which type of shocks hit the economy: while, in general, all demand shocks to output imply a reaction of inflation of the same sign, the latter will be less pronounced when output fluctuations are driven by supply shocks. In addition, a sharp deceleration of activity, as opposed to a subdued but protracted slowdown, results in a swifter decline in inflation. Inflation exhibits a rather strong persistence, with a negative impact still visible three years after the initial shock.
Subjects: 
demand shock
inflation response
Macro model
output growth
Phillips curve
JEL: 
E31
E32
E37
Document Type: 
Working Paper

Files in This Item:
File
Size





Items in EconStor are protected by copyright, with all rights reserved, unless otherwise indicated.