Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/212107
Authors: 
Paloviita, Maritta
Year of Publication: 
2008
Series/Report no.: 
Bank of Finland Research Discussion Papers No. 16/2008
Abstract: 
This paper examines euro area inflation dynamics by estimating open economy New Keynesian Phillips curves based on the assumption that all imports are intermediate goods. Instead of imposing rational expectations a priori, Consensus Economics survey data and OECD inflation forecasts are used to proxy inflation expectations. The results suggest that, compared with a closed economy New Keynesian Phillips curve, euro area inflation dynamics are better captured by the open economy specification. Moreover, in the open economy context, and even if we allow for persistence in expectations, the hybrid specification of the New Keynesian Phillips curve is needed in order to capture the euro area inflation process properly. We also provide some evidence that in recent years of low and stable inflation, euro area inflation dynamics have become more forward-looking and the link between inflation and domestic demand has weakened (ie the euro area Phillips curve has flattened). On the other hand, in low-inflation euro area countries the inflation process seems to have been more forward-looking already since the early 1980s
Persistent Identifier of the first edition: 
ISBN: 
978-952-462-449-7
Document Type: 
Working Paper

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