Title: Low inflation in advanced economies
Authors: Luis J Alvarez - Bank of Spain (Spain) [presenting]
Ana Gomez-Loscos - Bank of Spain (Spain)
Lola Gadea - University of Zaragoza (Spain)
Abstract: In recent years, actual inflation in most advanced economies has been below Central Bank's targets despite very expansionary monetary policies and a recovery in economic activity. This protracted period of low inflation has affected not only headline but also core inflation. We use a sample 27 advanced economies and a detailed sectoral breakdown to account for product heterogeneity in price setting. We find clear evidence of breaks in mean inflation and estimate two-state Markov switching models. We clearly distinguish between low and high inflation states and find that the conditional probability of remaining in low inflation is high. Furthermore, country inflation dynamics shows some common features, so we use Finite Mixtures Markov switching models to endogenously identify groups of countries. We find that non-European countries are clearly split from European ones and, in Europe, we distinguish core (those with price stability, such as Germany) and peripheral countries (traditionally inflationary countries, such as Spain). Finally, we estimate Markov switching models with state dependent means to study asymmetries in inflation drivers (inflation expectations, external prices, slack, ULCs...).