European inflation dynamics

Jordi Galí, Mark Gertler, J. David López-Salido

    Research output: Contribution to journalArticlepeer-review

    Abstract

    We provide evidence on the fit of the New Phillips Curve (NPC) for the Euro area over the period 1970-1998, and use it as a tool to compare the characteristics of European inflation dynamics with those observed in the U.S. We also analyze the factors underlying inflation inertia by examining the cyclical behavior of marginal costs, as well as that of its two main components, namely, labor productivity and real wages. Some of the findings can be summarized as follows: (a) the NPC fits Euro area data very well, possibly better than U.S. data, (b) the degree of price stickiness implied by the estimates is substantial, but in line with survey evidence and U.S. estimates, (c) inflation dynamics in the Euro area appear to have stronger forward-looking component (i.e., less inertia) than in the U.S., (d) labor market frictions, as manifested in the behavior of the wage markup, appear to have played a key role in shaping the behavior of marginal costs and, consequently, inflation in Europe.

    Original languageEnglish (US)
    Pages (from-to)1237-1270
    Number of pages34
    JournalEuropean Economic Review
    Volume45
    Issue number7
    DOIs
    StatePublished - 2001

    Keywords

    • EMU
    • Inflation
    • Phillips curve

    ASJC Scopus subject areas

    • Finance
    • Economics and Econometrics

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