Are Non-Euro Area EU Countries Importing Low Inflation from the Euro Area?
IMF Working Papers, October 22, 2014
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Bibliographic details
- Authors: Plamen K Iossifov, Jiri Podpiera
- Published: October 22, 2014
- Series: IMF Working Papers
- DOI: https://doi.org/10.5089/9781484300527.001
Summary and main findings
- 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.
- Regression results from an estimated open-economy, New Keynesian Phillips curve (controlling for imported inflation) suggest:
- Falling food and energy prices have been the main disinflationary driver.
- Low core inflation in the euro area has had a clear and significant impact on non-euro area EU countries.
- Countries with more rigid exchange-rate regimes and higher share of foreign value added in domestic demand have been more affected.
Methodology
- Model estimated: open-economy, New Keynesian Phillips curve.
- Key control: imported inflation (explicitly controlled for in regressions).
- Identification emphasis: instrumented euro area inflation is noted among keywords, indicating attention to endogeneity in spillover estimation.
Heterogeneity of effects
- Exchange-rate regime:
- Countries with more rigid exchange-rate regimes experienced stronger transmission of low euro-area inflation.
- Trade structure:
- Higher share of foreign value added in domestic demand is associated with greater exposure to euro-area inflation dynamics.
Policy implications and considerations
- The scope for monetary response in non-euro area EU countries to low inflation depends on:
- Concerns about financial stability.
- Risks of unanchoring of inflationary expectations.
- Exchange rate regime dynamics.
- Capital flows dynamics.
Subject areas and keywords (as provided)
- Subject: Exchange rate arrangements, Foreign exchange, Inflation, Inflation targeting, Monetary policy, Nominal effective exchange rate, Price controls, Prices
- Keywords include: CEE country, Central and Eastern Europe, Denmark, EA core inflation projection, EA inflation target, EU country, euro area, euro area core inflation, euro area price pressure, Exchange rate arrangements, food price inflation, Global, headline inflation, Inflation, inflation expectation, inflation spillover, Inflation targeting, inflation variance, instrumented euro area inflation, Nominal effective exchange rate, price, Price controls, Sweden, targeting CEE, United Kingdom, WP