Inflation Persistence Euro Area and New EU Member States

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Franta, Michal; Saxa, Branislav; Šmídková, Katerina

Working Paper Inflation persistence: euro area and new EU Member States

ECB Working Paper, No. 810

Provided in Cooperation with: European Central Bank (ECB)

Suggested Citation: Franta, Michal; Saxa, Branislav; Šmídková, Katerina (2007) : Inflation persistence: euro area and new EU Member States, ECB Working Paper, No. 810, European Central Bank (ECB), Frankfurt a. M.

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Inflation persistence euro area and new EU Member States

by Michal Franta, Branislav Saxa and Kateřina Šmídková Working Paper SerieS NO 810 / september 2007

Inflation persistence euro area and new EU Member States 1

by Michal Franta 2, Branislav Saxa 3 and Kateřina Šmídková 4

In 2007 all ECB publications This paper can be downloaded without charge from feature a motif taken from the http://www.ecb.int or from the Social Science Research Network €20 banknote. electronic library at http://ssrn.com/abstract_id=1010955.

1 The views expressed are those of the authors, and do not necessarily represent those of the affiliated institutions. We thank Michael Ehrmann, Roman Horváth, Klaus Adam and Oreste Tristani for comments and suggestions and Luca Benati for comments and help with the code. The paper has been written with the support of the Czech National Bank’s research project B4/03. 2 Corresponding author: Czech National Bank and CERGE-EI, P.O. Box 882, Politickych veznu 7, 111 21 Praha 1, Czech Republic; e-mail: [email protected] 3 Czech National Bank and CERGE-EI, P.O. Box 882, Politickych veznu 7, 111 21 Praha 1, Czech Republic; e-mail: [email protected]. Branislav Saxa worked on the paper during his internship at the European Central Bank. 4 Czech National Bank and Charles University, Postal address: Czech National Bank, Na Příkopě 28, 115 03 Prague 1, Czech Republic; e-mail: [email protected] © European Central Bank, 2007

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ISSN 1561-0810 (print) ISSN 1725-2806 (online) CONTENTS

Abstract 4 Non-technical summary 5 1 Introduction 7 2 Related literature 9 3 Stylized facts and models for estimating inflation persistence 11 3.1 Statistical measures – parametric (autoregressive models) 13 3.2 Structural measures 16 4 Results 17 4.1 Statistical measures – parametric (autoregressive models) 17 4.2 Structural measures 27 5 Conclusions 30 References 32 Appendix 1: Data description 35 Appendix 2: Sum of autoregressive coefficients – core inflation 36 Appendix 3: Inflation plots for selected countries 38 European Central Bank Working Paper Series 40

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ECB Working Paper Series No 810 September 2007 39 European Central Bank Working Paper Series

For a complete list of Working Papers published by the ECB, please visit the ECB’s website (http://www.ecb.int)

758 “Red tape and delayed entry” by A. Ciccone and E. Papaioannou, June 2007.

759 “Linear-quadratic approximation, external habit and targeting rules” by P. Levine, J. Pearlman and R. Pierse, June 2007.

760 “Modelling intra- and extra-area trade substitution and exchange rate pass-through in the euro area” by A. Dieppe and T. Warmedinger, June 2007.

761 “External imbalances and the US current account: how supply-side changes affect an exchange rate adjustment” P. Engler, M. Fidora and C. Thimann, June 2007.

762 “Patterns of current account adjustment: insights from past experience” by B. Algieri and T. Bracke, June 2007.

763 “Short- and long-run tax elasticities: the case of the Netherlands” by G. Wolswijk, June 2007.

764 “Robust monetary policy with imperfect knowledge” by A. Orphanides and J. C. Williams, June 2007.

765 “Sequential optimization, front-loaded information, and U.S. consumption” by A. Willman, June 2007.

766 “How and when do markets tip? Lessons from the Battle of the Bund” by E. Cantillon and P.-L. Yin, June 2007.

767 “Explaining monetary policy in press conferences” by M. Ehrmann and M. Fratzscher, June 2007.

768 “A new approach to measuring competition in the loan markets of the euro area” by M. van Leuvensteijn, J. A. Bikker, A. van Rixtel and C. Kok Sørensen, June 2007.

769 “The ‘Great Moderation’ in the United Kingdom” by L. Benati, June 2007.

770 “Welfare implications of Calvo vs. Rotemberg pricing assumptions” by G. Lombardo and D. Vestin, June 2007.

771 “Policy rate decisions and unbiased parameter estimation in typical monetary policy rules” by J. Podpiera, June 2007.

772 “Can adjustment costs explain the variability and counter-cyclicality of the labour share at the firm and aggregate level?” by P. Vermeulen, June 2007.

773 “Exchange rate volatility and growth in small open economies at the EMU periphery” by G. Schnabl, July 2007.

774 “Shocks, structures or monetary policies? The euro area and US after 2001” by L. Christiano, R. Motto and M. Rostagno, July 2007.

775 “The dynamic behaviour of budget components and output” by A. Afonso and P. Claeys, July 2007.

776 “Insights gained from conversations with labor market decision makers” by T. F. Bewley, July 2007.

777 “Downward nominal wage rigidity in the OECD” by S. Holden and F. Wulfsberg, July 2007.

778 “Employment protection legislation and wages” by M. Leonardi and G. Pica, July 2007.

779 “On-the-job search and the cyclical dynamics of the labor market” by M. U. Krause and T. A. Lubik, July 2007.

ECB Working Paper Series No 810 40 September 2007 780 “Dynamics and monetary policy in a fair wage model of the business cycle” by D. de la Croix, G. de Walque and R. Wouters, July 2007.

781 “Wage inequality in Spain: recent developments” by M. Izquierdo and A. Lacuesta, July 2007.

782 “Panel data estimates of the production function and product and labor market imperfections” by S. Dobbelaere and J. Mairesse, July 2007.

783 “The cyclicality of effective wages within employer-employee matches – evidence from German panel data” by S. Anger, July 2007.

784 “Understanding the dynamics of labor shares and inflation” by M. Lawless and K. Whelan, July 2007.

785 “Aggregating Phillips curves” by J. Imbs, E. Jondeau and F. Pelgrin, July 2007.

786 “The economic impact of merger control: what is special about banking?” by E. Carletti, P. Hartmann and S. Ongena, July 2007.

787 “Finance and growth: a macroeconomic assessment of the evidence from a European angle” by E. Papaioannou, July 2007.

788 “Evaluating the real effect of bank branching deregulation: comparing contiguous counties across U.S. state borders” by R. R. Huang, July 2007.

789 “Modeling the impact of external factors on the euro area’s HICP and real economy: a focus on pass-through and the trade balance” by L. Landolfo, July 2007.

790 “Asset prices, exchange rates and the current account” by M. Fratzscher, L. Juvenal and L. Sarno, August 2007.

791 “Inquiries on dynamics of transition economy convergence in a two-country model” by J. Brůha and J. Podpiera, August 2007.

792 “Euro area market reactions to the monetary developments press release” by J. Coffinet and S. Gouteron, August 2007.

793 “Structural econometric approach to bidding in the main refinancing operations of the Eurosystem” by N. Cassola, C. Ewerhart and C. Morana, August 2007.

794 “(Un)naturally low? Sequential Monte Carlo tracking of the US natural interest rate” by M. J. Lombardi and S. Sgherri, August 2007.

795 “Assessing the Impact of a change in the composition of public spending: a DSGE approach” by R. Straub and I. Tchakarov, August 2007.

796 “The impact of exchange rate shocks on sectoral activity and prices in the euro area” by E. Hahn, August 2007.

797 “Joint estimation of the natural rate of interest, the natural rate of unemployment, expected inflation, and potential output” by L. Benati and G. Vitale, August 2007.

798 “The transmission of US cyclical developments to the rest of the world” by S. Dées and I. Vansteenkiste, August 2007.

799 “Monetary policy shocks in a two-sector open economy: an empirical study” by R. Llaudes, August 2007.

800 “Is the corporate bond market forward looking?” by J. Hilscher, August 2007.

ECB Working Paper Series No 810 September 2007 41 801 “Uncovered interest parity at distant horizons: evidence on emerging economies & nonlinearities” by A. Mehl and L. Cappiello, August 2007.

802 “Investigating time-variation in the marginal predictive power of the yield spread” by L. Benati and C. Goodhart, August 2007.

803 “Optimal monetary policy in an estimated DSGE for the euro area” by S. Adjemian, M. Darracq Pariès and S. Moyen, August 2007.

804 “Growth accounting for the euro area: a structural approach” by T. Proietti and A. Musso, August 2007.

805 “The pricing of risk in European credit and corporate bond markets” by A. Berndt and I. Obreja, August 2007.

806 “State-dependency and firm-level optimization: a contribution to Calvo price staggering” by P. McAdam and A. Willman, August 2007.

807 “Cross-border lending contagion in multinational banks” by A. Derviz and J. Podpiera, September 2007.

808 “Model misspecification, the equilibrium natural interest rate and the equity premium” by O. Tristani, September 2007.

809 “Is the new Keynesian Phillips curve flat?” by K. Kuester, G. J. Müller und S. StÖelting, September 2007.

810 “Inflation persistence: euro area and new EU Member States” by M. Franta, B. Saxa and K. Šmídková, September 2007.

ECB Working Paper Series No 810 42 September 2007 Working Paper Series No 810 / SEPTEMBER 2007

Inflation persistence euro area and new EU Member States

by Michal Franta, Branislav Saxa and Kateřina Šmídková