European in#ation dynamics

Abstract

We provide evidence on the "t of the New Phillips Curve (NPC) for the Euro area over the period 1970}1998, and use it as a tool to compare the characteristics of European in#ation dynamics with those observed in the U.S. We also analyze the factors underlying in#ation inertia by examining the cyclical behavior of marginal costs, as well as that of its two main components, namely, labor productivity and real wages. Some of the "ndings can be summarized as follows: (a) the NPC "ts Euro area data very well, possibly better than U.S. data, (b) the degree of price stickiness implied by the estimates is substantial, but in line with survey evidence and U.S. estimates, (c) in#ation dynamics in the Euro area appear to have a stronger forward-looking component (i.e., less inertia) than in the U.S., (d) labor market frictions, as manifested in the behavior of the wage markup, appear to have played a key role in shaping the behavior of marginal costs and, consequently,

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