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Inflation and the Current Account in the Euro Area

Author

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  • Galstyan, Vahagn

    (Central Bank of Ireland)

Abstract

The euro area current account was on average in balance over 1999-2010 period, while the average rate of inflation was close to the ECB target. In contrast, the post-2011 increase in the euro area current account surplus has been accompanied by a period of low inflation. This paper suggests that observed low inflation can be partly explained by the surplus in the external balance. I propose a version of an open-economy inflation Phillips curve showing that, in addition to output gap and inflationary expectations, inflation is also shaped by the trade balance. At an empirical level, I find a statistically significant and negative correlation between the two variables.

Suggested Citation

  • Galstyan, Vahagn, 2019. "Inflation and the Current Account in the Euro Area," Economic Letters 4/EL/19, Central Bank of Ireland.
    • Handle: RePEc:cbi:ecolet:4/el/19
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    File URL: https://www.centralbank.ie/docs/default-source/publications/economic-letters/vol-2019-no-4-inflation-and-the-current-account-in-the-euro-area-(galstyan).pdf?sfvrsn=6
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    References listed on IDEAS

    as
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    Cited by:

    1. Galstyan, Vahagn, 2023. "Understanding the Joint Dynamics of Inflation and Wage Growth in the Euro Area," Research Technical Papers 11/RT/23, Central Bank of Ireland.
    2. Consolo, Agostino & Koester, Gerrit & Nickel, Christiane & Porqueddu, Mario & Smets, Frank, 2021. "The need for an inflation buffer in the ECB’s price stability objective – the role of nominal rigidities and inflation differentials," Occasional Paper Series 279, European Central Bank.
    3. Kabundi, Alain & De Simone, Francisco Nadal, 2022. "Euro area banking and monetary policy shocks in the QE era," Journal of Financial Stability, Elsevier, vol. 63(C).
    4. Fabian Eser & Peter Karadi & Philip R. Lane & Laura Moretti & Chiara Osbat, 2020. "The Phillips Curve at the ECB," Manchester School, University of Manchester, vol. 88(S1), pages 50-85, September.
    5. Schuler, Tobias & Sun, Yiqiao, 2022. "The current account and monetary policy in the euro area," Working Paper Series 2696, European Central Bank.
    6. Guillochon, Justine & Le Roux, Julien, 2023. "Unobserved components model(s): output gaps and financial cycles," Working Paper Series 2832, European Central Bank.
    7. Galstyan, Vahagn, 2019. "Factor Income and the Euro Area Current Account," Economic Letters 8/EL/19, Central Bank of Ireland.
    8. Koester, Gerrit & Lis, Eliza & Nickel, Christiane & Osbat, Chiara & Smets, Frank, 2021. "Understanding low inflation in the euro area from 2013 to 2019: cyclical and structural drivers," Occasional Paper Series 280, European Central Bank.

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