Determinants of Inflation in the Euro Area: The Role of Labor and Product Market Institutions

Abstract

While inflation differentials in a monetary union can be benign, reflecting a catch-up process, or an adjustment mechanism to asymmetric shocks or different business cycles, they may also indicate distortions related to inefficiencies in domestic product and labor markets that amplify or make more persistent the impact of shocks on inflation. The paper examines the determinants of inflation differentials in the euro area, with emphasis on the role of country specific labor and product market institutions. The analysis uses a traditional backwardlooking Phillips curve equation and augments it to explore the role of collective bargaining systems, union density, employment protection, and product market regulation. The model is estimated over a panel dataset of 10 euro area countries over the period 1983-2007. Results show that high employment protection, intermediate coordination of collective bargaining, and high union density increase the persistence of inflation. Oil and raw materials price shocks are also more likely to be accommodated by wage increases when the degree of coordination in collective bargaining is intermediate. These results are robust to different estimation methods, model specifications, and outliers. The paper suggests that reforming labor market institutions may improve the functioning of the euro area by reducing the risk of persistent inflation differentials.

Can Recurrent Neural Networks Predict Inflation in Euro Zone as Good as Professional Forecasters?

“…These findings support our modeling strategy when neural networks are considered in practical applications, i.e., for forecasting purposes. This is in line with [18,38] who found that multivariate models and more variables can improve inflation forecasts, while it is opposite to findings of [24,28] favoring simpler models. The same conclusion emerges when JNNs are compared with appropriate ARIMA models.…”

“…The remaining issue is the selection of appropriate exogenous inputs which can be also helpful in reducing the overfitting problem and increasing the forecasting accuracy. In order to include all the aspects of inflation expectations, the characteristics of demand-pull and cost-push inflation are considered, similar to [14,38]. Namely, vector x t in Equation ( 1) is four dimensional, that is, x t = (µ t , ω t , ψ t , δ t ), where µ t represents the monetary expansion rate, ω t is the unit labour cost change, ψ t is the depreciation exchange rate, and δ t is the rate of industrial production change.…”

Explaining Job Search Behavior in Unemployed Youngsters Beyond Perceived Employability: The Role of Psychological Capital

“…The International Labour Organization (ILO) (2015) highlights that persistently high youth unemployment rates have long-term consequences, for example skills erosion, increase of social exclusion and a higher level of poverty. Furthermore, the experience of unemployment at the beginning of professional life leaves scars, for example in terms of future salary ( Bell and Blanchflower, 2011 ), job and personal satisfaction ( Morsy and Jaumotte, 2012 ) and long-term unemployment ( Arulampalam et al, 2001 ). We demonstrated that psychological capital may facilitate job search as a way to overcome unemployment.…”

Jordan neural network for inflation forecasting

“…[23] defines financial variables that predict inflation as they reflect current and expected monetary policy responses and measures of real economic activity that predict inflation as they provide information on excess demand. The most commonly used variables are lagged inflation [9,29,31,32]; exchange rates [21,22,30,34]; monetary aggregates [11,27,28]; interest rates [20]; labour market variables, i.e. wages or unit labour costs [16,20]; GDP [9,20,25]; industrial production [7] and fiscal policy variables.…”