Scandinavian Working Papers in Economics
HomeAboutSeriesSubject/JEL codesAdvanced Search
Bank of Finland Research Discussion Papers, Bank of Finland

No 21/2004:
Inflation dynamics in the euro area and the role of expectations: further results

Maritta Paloviita ()

Abstract: This paper examines the empirical performance of the New Keynesian Phillips curve and its hybrid specification in the euro area. Instead of imposing rational expectations, direct measures, ie OECD forecasts, are used as empirical proxies for economic agents´ inflation expectations. Real marginal costs are proxied by three different measures. The results suggest that OECD inflation forecasts perform relatively well as a proxy for inflation expectations in the euro area, since under this approach the European inflation process can be modeled using the forward-looking New Keynesian Phillips curve. However, inflation can be modeled even more accurately by the hybrid Phillips curve. Thus, even allowing for possible non-rationality in expectations, the additional lagged inflation term is needed in the New Keynesian Phillips relation. In this approach, the output gap turns out to be at least as good a proxy for real marginal costs as the labor income share. Moreover, the inflation process seems to have become more forward-looking in the recent years of low and stable inflation.

Keywords: Phillips curve; expectations; euro area; (follow links to similar papers)

JEL-Codes: C52; E31; (follow links to similar papers)

28 pages, October 13, 2004

Before downloading any of the electronic versions below you should read our statement on copyright.
Download GhostScript for viewing Postscript files and the Acrobat Reader for viewing and printing pdf files.

Full text versions of the paper:

0421.pdf    PDF-file
Download Statistics
This paper is published as:
Paloviita, Maritta, (2006), 'Inflation dynamics in the euro area and the role of expectations', Empirical Economics, Vol. 31, pages 847-860

Questions (including download problems) about the papers in this series should be directed to Minna Nyman ()
Report other problems with accessing this service to Sune Karlsson () or Helena Lundin ().

Programing by
Design by Joachim Ekebom

Handle: RePEc:hhs:bofrdp:2004_021 This page was generated on 2014-12-14 19:21:31