Áreas de interés: Applied Macroeconomics, Time Series Econometrics , Expectations.
Otras áreas: Learning Models.
Stable, missing and wild inflation; the case of the Euro area
Resumen: Since the economic reopening following COVID-19, Euro area inflation has reached a 40-year high. This paper introduces a novel framework to diagnose the structural shocks at play, focusing on their nature (transitory and permanent) and channels (global, domestic, and energy supply shocks), while also emphasizing the modeling of second-moments to better capture extraordinary events. The model decomposes variables into trends and cycles, and obtains permanent and transitory shocks that feature stochastic volatility. In 2022, trend inflation has skyrocketed to 3-4% due to a reduction in production capacity – negative supply shocks from a global and domestic side. The inflation-gap (transitory part) is at 6-7%, explaining around 70% of the total increase in headline inflation, which is mainly driven by energy supply shocks and global-domestic excess demand. With these results, in the medium-term, headline inflation is expected to stay above the ECB’s inflation target. Overall, this paper offers new insights on what drivers have fueled Euro area inflation post-COVID19.