Inflation persistence in the euro area: the role of expectations

Abstract

This article analyses agents’ perception of the period of low inflation in recent years, in the context of a model in which these agents form their expectations on the basis of simple forecasting rules. The approach used allows a distinction to be drawn between which portion of the low inflation phenomenon might be due to temporary factors and which might be considered permanent. The results of the analysis for the euro area suggest that agents perceive the inflation rate’s recent departure from the monetary policy objective to be predominantly temporary, although these deviations are marked by a considerable degree of persistence. In comparative terms, the estimated persistence in the case of the euro area of the deviations observed from the inflation target approximately double those in the United States over the 1-and 5-year horizons.