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Explaining Irish Inflation during the Financial Crisis

Author

Listed:
  • Bermingham, Colin

    (Central Bank of Ireland)

  • Coates, Dermot

    (Central Bank of Ireland)

  • Larkin, John

    (Central Bank of Ireland)

  • O'Brien, Derry

    (Central Bank of Ireland)

  • O'Reilly, Gerard

    (Central Bank of Ireland)

Abstract

The recent financial crisis resulted in a steep contraction in the domestic economy together with a sharp decline in inflation. The Phillips curve model of inflation argues that inflation should be negatively related to economic performance and this would seem to be a potential explanatory factor in the behaviour of Irish inflation during the financial crisis. However, Ireland is a very open economy and the Phillips curve has been criticised as an inappropriate model of inflation for Ireland on the basis that inflation is primarily imported from abroad with little role for domestic factors. We formally assess what role domestic economic activity has on inflation in Ireland. We find that while external factors are important in terms of explaining Irish inflation, there are episodes when the domestic economy has an important influence on inflation. In addition, our preferred Phillips curve model predicts actual Irish inflation during the financial crisis quite accurately.

Suggested Citation

  • Bermingham, Colin & Coates, Dermot & Larkin, John & O'Brien, Derry & O'Reilly, Gerard, 2012. "Explaining Irish Inflation during the Financial Crisis," Economic Letters 13/EL/12, Central Bank of Ireland.
    • Handle: RePEc:cbi:ecolet:13/el/12
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    References listed on IDEAS

    as
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    Citations

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    Cited by:

    1. Gerlach, Stefan & Lydon, Reamonn & Stuart, Rebecca, 2015. "Unemployment and Inflation in Ireland: 1926-2012," CEPR Discussion Papers 10567, C.E.P.R. Discussion Papers.
    2. Byrne, Stephen & Conefrey, Thomas, 2017. "A Non-Employment Index for Ireland," Economic Letters 09/EL/17, Central Bank of Ireland.
    3. Baxa Jaromír & Plašil Miroslav & Vašíček Bořek, 2017. "Inflation and the steeplechase between economic activity variables: evidence for G7 countries," The B.E. Journal of Macroeconomics, De Gruyter, vol. 17(1), pages 1-42, January.
    4. Donal Smith, 2016. "The International Impact of Financial Shocks: A Global VAR and Connectedness Measures Approach," Discussion Papers 16/07, Department of Economics, University of York.
    5. William Gatt, 2016. "Time variation, asymmetry and threshold effect in Malta's Phillips curve," CBM Working Papers WP/02/2016, Central Bank of Malta.
    6. Gerlach, Stefan & Lydon, Reamonn & Stuart, Rebecca, 2014. "The Phillips Curve in Ireland: 1935 - 2012," CEPR Discussion Papers 10010, C.E.P.R. Discussion Papers.
    7. Owen Grech & Noel Rapa, 2016. "STREAM: A structural macro-econometric model of the Maltese economy," CBM Working Papers WP/01/2016, Central Bank of Malta.

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    More about this item

    JEL classification:

    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • E37 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Forecasting and Simulation: Models and Applications

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