European Parliament Library

Can Domestic Policies Influence Inflation?, Ashoka Mody, Franziska Ohnsorge

Abstract
Globalization operates not only by reducing domestic pressures on inflation but also by reducing the scope of domestic authorities to influence the pace of inflation. First, as markets are integrated, the common, cross-border sources of inflation increase, reducing the extent of domestically-generated inflation. Based on a methodology identifying common time and sectoral trends, we find this to be especially the case in the countries of the eurozone, with their longer histories of product market integration. Second, even the domestically-generated component of inflation may be difficult to manipulate. Policies act, especially in the shortrun, through managing domestic demand. But the relationship between domestic demand (proxied by the output gap and unit labor cost growth) and inflation has been weak, constrained in part by trade openness. Moreover, the domestic component of inflation contains a country-specific international catch-up process that generates price equalization across countries. The evidence is that catch-up has accelerated with increasing market integration. Thus, for the eurozone economies, there may be limits on the use of fiscal and labor market policies to contain inflation. The new member states may not have policy leverage to meet the Maastricht inflation limit necessary for entering the eurozone. Casestudies show that fiscal consolidation needed to comply with the inflation criterion can be large and sustained only briefly to get under the Maastricht wire
Table Of Contents
Contents; I. Introduction; II. Decomposition of Inflation Into Common and Country-Specific Components; Boxes; 1. Defining Country-Specific Inflation; III. The Determinants of Country-Specific Inflation; A. The Baseline Regression; B. Traded vs. Non-Traded Goods; C. Shifts Over Time; IV. Disinflation Episodes in Europe; 2. Disinflation episodes in Spain, Portugal, Greece, and Ireland; V. Conclusions; Appendix Table; Data and Sources; Figures; 1. EU25: Average Commodity-Specific Inflation; 2. EU25: European Business Cycle Inflation, Oil Price and Unemployment
Language
eng
Literary Form
non fiction
Note
Description based upon print version of record
Physical Description
1 online resource (38 p.)
Specific Material Designation
remote
Form Of Item
online
Isbn
9781451912739

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