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Determinants of Inflation Differentials in the Euro Area: Is the New Keynesian Phillips Curve Enough?

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  • Sérgio Lagoa

Abstract

In the euro area, inflation rates diverged after the creation of the single currency, and started to converge again from mid-2002. It is against this background that the paper studies the determinants of inflation differentials in the euro area. We start by using the New Keynesian Phillips Curve (NKPC) to explain inflation differences for a panel of countries. Exchange rate movements and expected inflation in particular play an important part in bringing about diverging inflation dynamics, while lagged inflation does not. The Incomplete Competition Model (ICM) adds explanatory power to the NKPC in describing inflation dynamics across countries. The latter model does not encompass ICM, and the variables proposed by the ICM are statistically significant: the growth in nominal Unit Labour Cost and the long-run disequilibrium between prices and costs explain inflation differentials.

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  • Sérgio Lagoa, 2017. "Determinants of Inflation Differentials in the Euro Area: Is the New Keynesian Phillips Curve Enough?," Journal of Applied Economics, Taylor & Francis Journals, vol. 20(1), pages 75-103, May.
    • Handle: RePEc:taf:recsxx:v:20:y:2017:i:1:p:75-103
    DOI: 10.1016/S1514-0326(17)30004-1
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    Cited by:

    1. Petar Soric & Enric Monte & Salvador Torra & Oscar Claveria, 2022. "“Density forecasts of inflation using Gaussian process regression models”," AQR Working Papers 202207, University of Barcelona, Regional Quantitative Analysis Group, revised Jul 2022.
    2. Nasir, Muhammad Ali & Huynh, Toan Luu Duc, 2024. "Nexus between inflation and inflation expectations at the zero lower bound: A tiger by the tail," Economic Modelling, Elsevier, vol. 131(C).
    3. Menz, Jan-Oliver & Wieland, Elisabeth & Mehrhoff, Jens, 2022. "Estimating the impact of quality adjustment on consumer price inflation," Discussion Papers 49/2022, Deutsche Bundesbank.
    4. Nasir, Muhammad Ali & Balsalobre-Lorente, Daniel & Huynh, Toan Luu Duc, 2020. "Anchoring inflation expectations in the face of oil shocks & in the proximity of ZLB: A tale of two targeters," Energy Economics, Elsevier, vol. 86(C).
    5. Castañeda, Juan E. & Cendejas, José Luis, 2022. "Macroeconomic asymmetry in the Eurozone before and after the Global Financial Crisis: An appraisal of the role of the ECB," Journal of Policy Modeling, Elsevier, vol. 44(1), pages 184-202.
    6. Nasir, Muhammad Ali & Huynh, Toan Luu Duc & Yarovaya, Larisa, 2020. "Inflation targeting & implications of oil shocks for inflation expectations in oil-importing and exporting economies: Evidence from three Nordic Kingdoms," International Review of Financial Analysis, Elsevier, vol. 72(C).
    7. Mohsin, Muhammad & Ullah, Hafeez & Iqbal, Nadeem & Iqbal, Wasim & Taghizadeh-Hesary, Farhad, 2021. "How external debt led to economic growth in South Asia: A policy perspective analysis from quantile regression," Economic Analysis and Policy, Elsevier, vol. 72(C), pages 423-437.
    8. David Mautin Oke & Koye Gerry Bokana & Adebowale Soluade, 2017. "Re-examining Exchange Rate Regimes and Inflation Nexus: An ARDL Analysis for Nigerian Case," Acta Universitatis Danubius. OEconomica, Danubius University of Galati, issue 13(6), pages 253-266, DECEMBER.
    9. Christina Anderl & Guglielmo Maria Caporale, 2023. "The Asymmetric Impact of Economic Policy and Oil Price Uncertainty on Inflation: Evidence from Developed and Emerging Economies," CESifo Working Paper Series 10276, CESifo.
    10. Adel Benhamed & Mohamed Sadok Gassouma, 2023. "Preventing Oil Shock Inflation: Sustainable Development Mechanisms vs. Islamic Mechanisms," Sustainability, MDPI, vol. 15(12), pages 1-16, June.
    11. Deluna, Roperto S. & Loanzon, Jeanette Isabelle V. & Tatlonghari, Virgilio M., 2021. "A nonlinear ARDL model of inflation dynamics in the Philippine economy," Journal of Asian Economics, Elsevier, vol. 76(C).
    12. Eder, Andreas & Koller, Wolfgang & Mahlberg, Bernhard, 2019. "Price Competitiveness in the European Monetary Union: A Decomposition of Inflation Differentials based on the Leontief Input-Output Price Model for the Period 2000 to 2014," MPRA Paper 95158, University Library of Munich, Germany.
    13. Nasir, Muhammad Ali & Duc Huynh, Toan Luu & Vo, Xuan Vinh, 2020. "Exchange rate pass-through & management of inflation expectations in a small open inflation targeting economy," International Review of Economics & Finance, Elsevier, vol. 69(C), pages 178-188.

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