The seminar will be held at 10 am. in Visitor Centre.
As the topic may arouse a lot of interest please confirm your attendance by April 7 to: szilagyiesz@mnb.hu
Introduction
The scope of this paper is to provide a summary of current knowledge on inflation persistence and price stickiness in the euro area. A thorough understanding of the patterns and determinants of inflation persistence is important for policymakers, as inflation persistence has immediate consequences for conducting monetary policy; for example, the appropriate response to shocks depends on the degree to which their effect on inflation is persistent. While it is the properties of aggregate inflation that are eventually of interest for policy making, it is crucial to understand the main features and determinants of the behavioural mechanisms underlying price setting, as these are an important factor in the way prices and inflation behave over time. Accordingly, this paper will be organised around three main questions: - What are the characteristics of inflation dynamics in the euro area? - What do micro data tell us about price setting behaviour in the euro area? - What lessons can we draw for monetary policy making? The paper draws mainly on results of the Eurosystem Inflation Persistence Network (hereafter IPN). The IPN has been a collaborative endeavour of all NCBs of the Eurosystem and the ECB, aimed at conducting an in-depth study of the patterns and determinants of inflation persistence. For these purposes, the IPN has availed itself of an unprecedented data set, covering a large amount of information on macroeconomic and sectoral variables and on price-setting behaviour at the individual firm level (see Annex for a more detailed overview). On the one hand, the individual price records underlying the construction of both consumer and producer price indices have been made available in a large number of euro area countries, often covering a large fraction of the total databases constructed by the National Statistical Institutes. On the other hand, the IPN has conducted surveys on price setting behaviour in nine countries of the euro area. Taken together, these databases constitute a unique opportunity to understand the behaviour of price setters. They are unprecedented even in an international comparison, as the coverage of data available to the IPN extends beyond what is available for other economies, including the United States. This paper has been written with an emphasis on information that can be of interest for the monetary policy debate and that has interesting policy implications. The work is structured as follows. Section 1 provides an overall summary of the results which will be presented in the rest of the paper. Section 2 explains the concept of inflation persistence in the context of a small, stylised model of inflation dynamics, and discusses to what extent inflation persistence is interrelated with price stickiness. After this, Section 3 reports the evidence on inflation persistence at the macroeconomic level for the euro area as well as at the country and sectoral level. The importance of administered prices and aggregation for inflation persistence is discussed, and the role of inflation expectations is analysed. Section 4 looks at the mechanics of individual price adjustment. Patterns of price setting (such as the frequencies at which prices are changed or their magnitudes), the rules followed by price setters as well as the reasons for sluggish price dynamics are presented and discussed, separately for producer and consumer prices. Finally, Section 5 discusses some policy implications of the findings, while Section 6 concludes.
This paper heavily draws on the large number of research papers that have been produced in the context of the Inflation Persistence Network (IPN), a collaborative endeavour of all NCBs of the Eurosystem and the ECB, aimed at conducting an in-depth study of the patterns and determinants of inflation persistence. See www.ecb.int for a complete list. Moreover, the paper has benefited substantially from comments and input received by members of the IPN.2