{
  "title": "A Bottom-Up Reduced Form Phillips Curve for the Euro Area",
  "publication": "IMF Working Papers, December 16, 2022",
  "sourceUrl": "https://www.imf.org/en/publications/wp/issues/2022/12/16/a-bottom-up-reduced-form-phillips-curve-for-the-euro-area-522749",
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  "summary": "We develop a bottom-up model of inflation in the euro area based on a set of augmented Phillips curves for seven sub-components of core inflation, and auxiliary regressions for non-core items.",
  "sections": [
    {
      "heading": "Model and approach",
      "content": "- Develops a bottom-up model of inflation in the euro area based on:\n  - a set of augmented Phillips curves for seven sub-components of core inflation, and\n  - auxiliary regressions for non-core items.\n- Disaggregated structure improves forecasting performance relative to a standard one-equation Phillips curve, particularly since the onset of the Covid-19 pandemic in early-2020 and the subsequent energy shocks.\n- Emphasizes the utility of the bottom-up approach as a complement to existing forecasting tools by:\n  - improving forecast accuracy,\n  - shedding additional light on drivers of inflation, and\n  - providing a framework to apply ex-post judgement in a structured way."
    },
    {
      "heading": "Key empirical findings",
      "content": "- International energy and food prices play a key role in explaining the recent surge in inflation:\n  - As of Q2 2022, they account for 75 percent of the increase in headline inflation.\n  - As of Q2 2022, they account for 30 percent of the increase in core inflation.\n- Other contributors:\n  - Economic slack and inflation expectations explain another 10 percent of the increase in headline inflation.\n  - Economic slack and inflation expectations explain another 20 percent of the increase in core inflation.\n- Unexplained component:\n  - Around one-third of the increase in core inflation remains unexplained by the model."
    },
    {
      "heading": "Forecasts and projections",
      "content": "- Out-of-sample projections indicate:\n  - High uncertainty around the inflation path.\n  - Inflation pressures are unlikely to dissipate quickly."
    },
    {
      "heading": "Implications for forecasters and policymakers",
      "content": "- The bottom-up approach is especially useful in an environment of sectoral shocks because it:\n  - Improves forecast accuracy relative to aggregate single-equation approaches,\n  - Identifies the relative contributions of international energy and food prices versus domestic factors such as slack and expectations, and\n  - Provides a structured framework to incorporate judgement and to interpret sectoral drivers of inflation.\n\nSource: A Bottom-Up Reduced Form Phillips Curve for the Euro Area, Thomas McGregor and Frederik G Toscani, IMF Working Paper No. 2022/260.\n\n---\n\n Content in this bundle\n\n- Working Paper\n  - Working Paper (Markdown version){rel=\"alternate\" type=\"text/markdown\"}\n  - Working Paper (PDF){rel=\"external\" type=\"application/pdf\"}\n\n---\n\nSource: https://www.imf.org/en/publications/wp/issues/2022/12/16/a-bottom-up-reduced-form-phillips-curve-for-the-euro-area-522749"
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    "Authors: Thomas McGregor, Frederik G Toscani",
    "Published: December 16, 2022",
    "Series: IMF Working Papers",
    "DOI: https://doi.org/10.5089/9798400219108.001",
    "Develops a bottom-up model of inflation in the euro area based on:",
    "Disaggregated structure improves forecasting performance relative to a standard one-equation Phillips curve, particularly since the onset of the Covid-19 pandemic in early-2020 and the subsequent energy shocks.",
    "Emphasizes the utility of the bottom-up approach as a complement to existing forecasting tools by:",
    "International energy and food prices play a key role in explaining the recent surge in inflation:",
    "Other contributors:",
    "Unexplained component:",
    "Out-of-sample projections indicate:",
    "The bottom-up approach is especially useful in an environment of sectoral shocks because it:",
    "**Working Paper**"
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