European Inflation DynamicsWe provide evidence on the fit of the New Phillips Curve (NPQ 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 a 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. |
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aggregate assumption average labor average real marginal backward looking price baseline model CEPR Policy Paper constructed aggregate countercyclical cyclical David López decomposition degree of price detrended output disinflation Erceg Euro area European central banks eurozone factor fraction of firms fundamental inflation GDP deflator hybrid model implied inefficiency wedge inflation dynamics labor income share labor market frictions labor share lags of inflation Ljung-Box test log-linear looking behavior marginal cost-based Mark Gertler MC₁ monopolistically competitive movement in marginal nominal wage obtain orthogonality conditions output gap overidentifying restrictions p-value P₁ persistence in inflation Phillips curve analysis price rigidity primitive parameters pure forward looking real marginal cost real unit labor real wage reduced form relates inflation reset rise Sbordone slope coefficient specifications staggered nominal steady sticky price subscription supply shocks traditional Phillips curve U.S. data unit labor costs variable wage markup wage rigidity www.cepr.org π₁