Can aggregation explain the persistence of inflation?

An aggregation exercise is proposed that aims at investigating whether the fast average adjustments of the disaggregate inflation series of the euro area CPI is coherent with the slow adjustment of euro area aggregate inflation. Estimating a dynamic factor model for 404 inflation sub-indices of the...

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Bibliographic Details
Published in:Journal of monetary economics 2009-03, Vol.56 (2), p.231-241
Main Authors: Altissimo, Filippo, Mojon, Benoit, Zaffaroni, Paolo
Format: Article
Language:English
Subjects:
Aggregation
Consumer Price Index
Data aggregation
Economic and Monetary Union
Economic models
Euro area
Europe
Eurozone
Inflation
Inflation persistence
Inflation Persistence Aggregation Euro area Price stickiness
Monetary economics
Persistence
Price stickiness
Sticky prices
Studies
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Summary:An aggregation exercise is proposed that aims at investigating whether the fast average adjustments of the disaggregate inflation series of the euro area CPI is coherent with the slow adjustment of euro area aggregate inflation. Estimating a dynamic factor model for 404 inflation sub-indices of the euro area CPI allows to decompose the dynamics of inflation sub-indices into a part due to a common macroeconomic shock and to sector specific idiosyncratic shocks. Although idiosyncratic shocks dominate the variance of sectoral prices, one common factor appears to be the main driver of aggregate dynamics. In addition, the heterogenous propagation of this common shock across sectoral inflation rates, and in particular its slow propagation to inflation rates of services, generates the persistence of aggregate inflation. We conclude that the aggregation mechanism explains a significant amount of aggregate inflation persistence.
ISSN:0304-3932
1873-1295
DOI:10.1016/j.jmoneco.2008.12.013