Domestic and Global Determinants of Inflation: Evidence from Expectile Regression*

Abstract

The paper investigates the role of domestic and global determinants of euro area core inflation. We analyse the entire conditional distribution of inflation by estimating a Phillips curve type relationship using an expectile regression approach, extended to capture time-varying effects. The main findings are as follows. First, both the domestic and foreign output gap are significant drivers of euro area core inflation, once external demand pressures are properly orthogonalized in a modified measure of domestic gap. However, the inflationary impact of the domestic component is relatively stronger. Second, the domestic output gap has a bigger influence in the right tail of the conditional distribution of inflation. Third, adding international price pressures in the regression weakens the link between inflation and the foreign output gap. Fourth, in a time-varying perspective, there is an increase in the response of inflation to the domestic gap in the last decade but only at the lower quantiles. Overall, the evidence on the so-called "globalization hypothesis" is mixed: while the pass-through to inflation of foreign prices and the exchange rate increased over time at all quantiles, the impact of global slack remained broadly stable, particularly in the central part of the distribution.

Evaluation of inflation and unemployment and plotting the Philips curve of the Czech Republic

“…Their findings call into question the explanation for recent inflationary behavior. Research by Busseti, Caivano and Delle Monache [13] has shown that the domestic output gap has a greater effect on the right part of the conditional inflation distribution graph than on the left part of the graph, suggesting a nonlinearity of the Phillips curve. The aim of Kadeřábková, Jasová and Holman [14] was to determine the nature and intensity of the slope of Phillips curves (PC) for workers at risk of unemployment in individual phases of the economic cycle between 2000 and 2016 in the Visegrad Group (V4).…”

Employment and the Conduct of Monetary Policy in the Euro Area

“…Consistent with this finding,Busetti et al (2021) estimate that the slope coefficient of the euro area price Phillips curve is only about half as large at the lower quantiles of the distribution of inflation outcomes when compared with the slope at the higher quantiles. A possible explanation for such non-linearity is the presence of downward nominal rigidities (see alsoForbes et al, 2020).116 In a similar vein, state dependence may emerge because the reaction of wages depends on the persistence of the underlying economic shocks.…”

The Role of Electronic Payments in Inflation Dynamics

“…For the inflation inertia effect, we use the lagged value of inflation (Kara et al, 2017;Fuhrer, 2012;Kamber et al, 2020;Mazumder, 2018;Stock and Watson, 2019;Zhang et al, 2008;Johnson, 1998;Rudd and Whelan, 2007). We include the local currency denominated import price for the effects of the exchange rate and the import price index (Guerrieri et al, 2010;Bianchi and Civelli, 2015;Kamber et al, 2020;Johnson, 1998;Busetti et al, 2019;Stock and Watson, 2008;Kara et al, 2017;Özmen and Topaloğlu, 2017;Dany-Knedlik and Garcia, 2018). Industrial production index is used as a proxy for real activity and output (Coibion and Gorodnichenko, 2013;Blanchard et al, 2015;Roberts, 1995;Stock and Watson, 2019;Özmen and Topaloğlu, 2017;Kara et al, 2017;Paloviita, 2008).…”