March 2019 issue contents
Missing Disinflation and Missing Inflation: A VAR Perspective

Elena Bobeica and Marek JarociƄski
European Central Bank

Abstract

In the immediate wake of the Great Recession we didn't see the disinflation that most models predicted and, subsequently, we didn't see the inflation they predicted. We show that these puzzles disappear in a vector autoregressive model that properly accounts for domestic and external factors. This model reveals strong spillovers from U.S. to euro-area inflation in the Great Recession. By contrast, domestic factors explain much of the euro-area inflation dynamics during the 2012-14 missing inflation episode. Consequently, euro-area economists and models that excessively focused on the global nature of inflation were liable to miss the contribution of deflationary domestic shocks in this period.

JEL Code: E31, E32, F44.

 
Full article (PDF, 34 pages, 1,733 kb)