A Phillips Curve for the Euro Area
This paper asks whether a textbook Phillips curve can explain the behavior of core inflation in the euro area. A critical feature of the analysis is that we measure core inflation with the weighted median of industry inflation rates, which is less volatile than the common measure of inflation excluding food and energy prices. We find that fluctuations in core inflation since the creation of the euro are well explained by three factors: expected inflation (as measured by surveys of forecasters); the output gap (as measured by the OECD); and the pass-through of movements in headline inflation. Our specification resolves the puzzle of a “missing disinflation” after the Great Recession, and it diminishes the puzzle of a “missing inflation” during the recent economic recovery.
We thank Michal Andrle for providing data for this paper. We are also grateful for excellent research assistance from Jionglin Zheng, and for comments from Aidan Meyler, Andrej Sokol, and participants in the European Central Bank conference on “Inflation in a Changing Economic Environment,” September 2019. This paper was completed while the first author was visiting the ECB as a Wim Duisenberg Fellow. The views expressed herein are those of the authors and do not necessarily reflect the views of the National Bureau of Economic Research.