Inflation and Output Comovement in the Euro Area: Love at Second Sight?
This paper discusses comovement between inflation and output in the euro area. The strength of the comovement may not be apparent at first sight, but is clear at business cycle frequencies. We propose a new estimation approach to trimmed mean inflation, determining jointly the upper and lower quantiles to be trimmed, as well as the frequency bandwidth of real output that best aligns inflation with the output cycle. Our results suggest that at business cycle frequency, the comovement of output and core inflation is high and stable, and that inflation lags behind the output cycle with roughly half of its variance. The strong relationship between output and inflation hints at the importance of demand shocks for the euro area business cycle.
JEL codes: C10, E32, E50
Keywords: Business cycle, core inflation, demand shocks, trimmed mean
Issued: August 2013
Download: CNB WP No. 7/2013 (pdf, 398 kB)