Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/153855
Authors: 
Koop, Gary
Onorante, Luca
Year of Publication: 
2012
Series/Report no.: 
ECB Working Paper 1422
Abstract: 
This paper uses forecasts from the European Central Bank’s Survey of Professional Forecasters to investigate the relationship between inflation and inflation expectations in the euro area. We use theoretical structures based on the New Keynesian and Neoclassical Phillips curves to inform our empirical work and dynamic model averaging in order to ensure an econometric specification capturing potential changes. We use both regression-based and VAR-based methods. The paper confirms that there have been shifts in the Phillips curve and identifies three sub-periods in the EMU: an initial period of price stability, a few years where inflation was driven mainly by external shocks, and the financial crisis, where the New Keynesian Phillips curve outperforms alternative formulations. This finding underlines the importance of introducing informed judgment in forecasting models and is also important for the conduct of monetary policy, as the crisis entails changes in the effect of expectations on inflation and a resurgence of the “sacrifice ratio”.
Subjects: 
Bayesian
financial crisis
inflation expectations
Phillips curve
Survey of Professional Forecasters
JEL: 
E31
C53
C11
Document Type: 
Working Paper

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