Price Setting and Inflation Persistence: Did Emu Matter?

81 Pages Posted: 25 Apr 2006

See all articles by Ignazio Angeloni

Ignazio Angeloni

Italian Finance Ministry - International Financial Relations

Luc Aucremanne

National Bank of Belgium

Matteo Ciccarelli

European Central Bank (ECB)

Date Written: March 2006

Abstract

Surprisingly it did not, or at least not directly. Using micro data on consumer prices and sectoral inflation rates from 6 euro area countries, spanning several years before and after the introduction of the euro, we look at whether EMU has altered the behaviour of retail price setting and/or inflation dynamics. We find no evidence that anything has changed around 1999 - if anything, persistence may have slightly increased. At the end of 2001 and in the beginning of 2002 (period surrounding the euro cash changeover) retail price adjustment frequencies, both up and down, increased substantially, while the magnitude of the price adjustment, also both up and down, was smaller than otherwise. However, both settled quickly back to the earlier patterns. On the contrary, we do find evidence of a decline in the persistence of the inflation process in the mid-1990s. This could be due to a structural change in private inflationary expectations due, at least in part, to policies linked to the preparation of EMU; however, this interpretation is weakened by the fact that a similar decline occurred also in the US.

Keywords: Price setting, Inflation persistence, Aggregate and Sectoral Inflation, EMU

JEL Classification: E31, E42, E52

Suggested Citation

Angeloni, Ignazio and Aucremanne, Luc and Ciccarelli, Matteo, Price Setting and Inflation Persistence: Did Emu Matter? (March 2006). ECB Working Paper No. 597, Available at SSRN: https://ssrn.com/abstract=887084

Ignazio Angeloni (Contact Author)

Italian Finance Ministry - International Financial Relations ( email )

Via XX Settembre 97
Rome, Rome 00187
Italy

Luc Aucremanne

National Bank of Belgium ( email )

Brussels, B-1000
Belgium

Matteo Ciccarelli

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany

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