The work analyses the contribution of domestic and foreign determinants to core inflation in the euro area. A Phillips curve type of relationship is estimated for the different quantiles of the inflation distribution during the period 1980-2016 and extended to capture time-varying effects. To disentangle the contribution of domestic demand pressures from that of foreign demand, a modified measure of the output gap is constructed.
Both the domestic and foreign components contribute to the underlying inflation trend in the euro area but the former are more important, especially when inflation is high, while the effect of the latter is uniform. The impact of internal cyclical fluctuations only increases over time on the left side of the distribution, while that of foreign prices increases for all quantiles.
Published in 2021 in: Oxford Bulletin of Economics and Statistics, v. 83, 4, pp. 982-1001
