Are Non-Euro Area EU Countries Importing Low Inflation from the Euro Area?

Author/Editor: Plamen Iossifov ; Jiri Podpiera
Publication Date: October 22, 2014
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Disclaimer: This Working Paper should not be reported as representing the views of the IMF. The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate
Summary: The synchronized disinflation across Europe since end-2011 raises the question of whether non-euro area EU countries are affected by the undershooting of the euro area inflation target. To shed light on this issue, we estimate an open-economy, New Keynsian Phillips curve, in which we control for imported inflation. Regression results suggest that falling food and energy prices have been the main disinflationary driver. But low core inflation in the euro area has also had a clear and significant impact. Countries with more rigid exchange-rate regimes and higher share of foreign value added in domestic demand have been more affected. The scope for monetary response to low inflation in non-euro area EU countries depends on concerns about financial stability and unanchoring of inflationary expectations, as well as on exchange rate regime and capital flows dynamics.
Series: Working Paper No. 14/191
Subject(s): Disinflation | Europe | Euro Area | Inflation targeting | Open economies | Econometric models

Publication Date: October 22, 2014
ISBN/ISSN: 9781484300527/1018-5941 Format: Paper
Stock No: WPIEA2014191 Pages: 34
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