Euro area inflation persistence

Abstract

This paper presents evidence on the lag between monetary policy actions and the response of inflation in the euro area as a whole as well as in some of its core countries, notably Germany, Italy and France. In line with previous findings for the US and the UK, results here show that it takes over a year before monetary policy actions have their maximum effect on inflation both in the euro area and in individual countries and that a lag of this length has existed in Europe at least since the collapse of the Bretton Woods system, despite the numerous changes in European monetary policy regime thereafter. Results based on alternative definitions of inflation persistence support these findings and indicate, if any, that transmission lags could be in fact much longer for individual countries and the euro area as a whole, although, at the country level, there is strong evidence over time of a drop in German inflation persistence and a sizeable shift in the mean of inflation – particularly in Italy and France. An examination based on results from this paper reveals that euro area inflation persistence could well be an intrinsic phenomenon rather than a ‘statistical fluke’ due to aggregation.