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

October 22, 2014

Preview Citation

Format: Chicago

Plamen K Iossifov, and Jiri Podpiera. Are Non-Euro Area EU Countries Importing Low Inflation from the Euro Area?, (USA: International Monetary Fund, 2014) accessed December 26, 2024

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.

Subject: Exchange rate arrangements, Foreign exchange, Inflation, Inflation targeting, Monetary policy, Nominal effective exchange rate, Price controls, Prices

Keywords: 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

Publication Details

Pages:

34
Volume:

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DOI:

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Issue:

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Series:

Working Paper No. 2014/191
Stock No:

WPIEA2014191
ISBN:

9781484300527
ISSN:

1018-5941

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