This paper investigates the inflation dynamics of Germany, Italy, Finland, the whole Europe Area and the United States, based on a General-Method of Moments (GMM) estimation. The New-Keynesian Model and the Real-Business-Cycle Model are essential for the estimation.
Table of Contents
1 Introduction
2 Stating a Standard New Keynesian Model
2.1 The Representative Household
2.2 The Price Setting Problem of the Representative Firm
2.3 The Role of the Central Bank
2.4 Log-Linearizing the Equations Characterizing the Equilibrium
3 Phillips Curve Analysis
3.1 Original Phillips Curve
3.2 Baseline New Keynesian Phillips Curve
3.3 Hybrid New Keynesian Phillips Curve
4 Inflation Dynamics and Price Rigidity Analysis
4.1 Data
4.2 Baseline Model Estimation
4.2.1 Baseline-Estimation Set-Up
4.2.2 Parameter Calibration
4.2.3 Results
4.3 Hybrid Model estimation
4.3.1 Hybrid-Estimation Set-Up
4.3.2 Results
5 Inflation Targeting Approach
5.1 Model Set-Up
5.2 One-Month Inflation Targeting Approach
5.3 Four-Months Inflation Targeting Approach
5.4 Inflation Targeting Europe vs. United States
6 Conclusion
Objectives and Research Themes
The primary objective of this thesis is to examine the heterogeneity of inflation dynamics and price rigidity within the European Monetary Union, focusing on Germany, Italy, and Finland, and comparing these results with the United States. The central research question addresses how the European Central Bank (ECB) can implement optimal monetary policy to maintain price stability given the distinct pricing characteristics of its member nations.
- Estimation of the New Keynesian Phillips Curve (NKPC) using Generalized Method of Moments (GMM).
- Analysis of country-specific price stickiness and inflation persistence.
- Comparison of forward-looking vs. backward-looking price setting behaviors.
- Evaluation of an inflation-targeting policy weighted by GDP share and price rigidity.
- Comparison of European inflation management against the Federal Reserve Bank.
Excerpt from the Book
1 Introduction
The price stability in the European Monetary Union is the main target of the European Central Bank (ECB). The ECB is facing a challenge changing interest rates in order to achieve the two percent inflation target that ensures price stability, regarding the variations in inflation among its 19 member countries at various times. Furthermore, there are not only different shapes of inflation, but also several degrees of price stickiness and inflation dynamics within the member countries that make policy decisions inflexible and rigid. Therefore, a profound investigation of the country-specific pricing characteristics is essential for the ECB to implement the optimal monetary policy, that combines both, price stability in the whole monetary union and in its member countries.
In the third part of this paper, we give proof of the heterogeneity within the Europe area, estimating the different degrees of price stickiness for Germany, Italy and Finland, with the help of a Generalized Method of Moments (GMM) estimation. We also investigate the degree of price rigidity for the United States and the Europe area as a whole. Just like Galí et al. (2001), we use a marginal-cost based New Keynesian Phillips Curve. We show that real marginal cost and inflation have a strong co-movement for Europe area countries, which justifies the usage of a marginal-cost NKPC, rather than an output-gap based NKPC. Our representative time frame ranges from the Bulletin of the ECB in January 1999 to 2015:I.
Summary of Chapters
1 Introduction: Provides an overview of the ECB's price stability mandate and sets the stage for investigating cross-country pricing heterogeneity.
2 Stating a Standard New Keynesian Model: Defines the theoretical foundations of the DSGE framework, including the behavior of representative households, firms, and the central bank.
3 Phillips Curve Analysis: Contrasts the traditional Phillips Curve with the New Keynesian and Hybrid New Keynesian versions.
4 Inflation Dynamics and Price Rigidity Analysis: Estimates price stickiness and inflation dynamics across Germany, Italy, Finland, the Europe area, and the U.S. using GMM.
5 Inflation Targeting Approach: Develops a proposed inflation-targeting model for the ECB based on country-specific GDP weights and price rigidity.
6 Conclusion: Summarizes the study's findings regarding European inflation heterogeneity and provides policy recommendations for the ECB.
Keywords
New Keynesian Phillips Curve, Inflation Dynamics, Price Rigidity, European Central Bank, Generalized Method of Moments, Monetary Policy, Price Stability, Euro Area, Germany, Italy, Finland, United States, Inflation Targeting, Marginal Cost, DSGE Model.
Frequently Asked Questions
What is the core focus of this thesis?
This work investigates the heterogeneity of inflation dynamics and price rigidity among representative Euro area countries (Germany, Italy, and Finland) and the U.S. to evaluate monetary policy effectiveness.
What are the primary thematic fields covered?
The study centers on New Keynesian economic theory, Phillips Curve modeling, GMM econometric estimation, and central bank inflation-targeting strategies.
What is the main research goal?
The goal is to determine how the ECB can maintain price stability by accounting for varying degrees of price stickiness across member countries when setting monetary policy.
Which scientific methodology is applied?
The author uses a Generalized Method of Moments (GMM) estimation to analyze the New Keynesian Phillips Curve (NKPC) and a Hybrid NKPC model.
What does the main body of the work explore?
It provides a theoretical derivation of the New Keynesian model, empirical estimations for different nations, and a quantitative analysis of optimal interest rate adjustments.
Which keywords best describe this research?
Key terms include Inflation Dynamics, Price Rigidity, New Keynesian Phillips Curve, European Monetary Union, and Monetary Policy.
Why are German and Italian inflation dynamics significant to this study?
These countries represent large portions of the Euro area GDP; the study finds they exhibit different price setting behaviors, necessitating a weighted approach by the ECB.
How does the ECB's performance compare to the Federal Reserve in this analysis?
The research concludes that the ECB has been more successful in maintaining inflation close to its target with less volatility compared to the U.S. Federal Reserve.
What is the impact of price rigidity on interest rate policy?
The author suggests that the ECB should assign higher weights in its policy decisions to countries with greater price rigidity to avoid "inflation-jumps" and maintain aggregate stability.
- Citar trabajo
- Marc Kern (Autor), 2015, Inflation Dynamics Reconsidered. Inflation Targeting Europe vs. United States, Múnich, GRIN Verlag, https://www.grin.com/document/317626
