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© 2023 International Monetary Fund
WP/23/30
IMF Working Paper
European and Research Departments
The 2020–2022 Inflation Surge Across Europe: A Phillips-Curve-Based Dissection
Prepared by Chikako Baba, Romain Duval, Ting Lan and Petia Topalova*
Authorized for distribution by Romain Duval
February 2023
IMF Working Papers describe research in progress by the author(s) and are published to elicit comments and to encourage debate. The views expressed in IMF Working Papers are those of the author(s) and do not necessarily represent the views of the IMF, its Executive Board, or IMF management.
ABSTRACT: In 2021–22, inflation in Europe soared to multidecade highs, consistently exceeding policymakers’ forecasts and surprising with its wide cross-country dispersion. This paper analyzes the key drivers of the inflation surge in Europe and its variation across countries. The analysis highlights significant differences in Phillips curve parameters across Europe’s economies. Inflation is more sensitive to domestic slack and external price pressures in emerging European economies compared to their advanced counterparts, which contributed to a greater passthrough of global commodity price shocks into domestic prices, and, consequently, to larger increases in inflation rates. Across Europe, inflation also appears to have become increasingly backward looking and more sensitive to commodity price shocks since the onset of the COVID-19 pandemic. This finding helps explain why conventional (Phillips curve) inflation models consistently underpredicted the 2021–2022 inflation surge, although it remains too early to conclude there has been a structural break in the inflation process.
RECOMMENDED CITATION: Baba, Chikako, Romain Duval, Ting Lan and Petia Topalova. 2023. The Inflation Surge in Europe. IMF Working Paper No. WP/23/30. Washington DC.
| JEL Classification Numbers: | E31, E37, E58 |
| Keywords: | inflation; Phillips curve; slack; external price; backward-looking |
| Author’s E-Mail Address: | cbaba@imf.org; rduval@imf.org; tlan@imf.org; ptopalova@imf.org |
| JEL Classification Numbers: | E31, E37, E58 |
| Keywords: | inflation; Phillips curve; slack; external price; backward-looking |
| Author’s E-Mail Address: | cbaba@imf.org; rduval@imf.org; tlan@imf.org; ptopalova@imf.org |
Contents
I. Introduction
II. Empirical Phillips Curves for Europe
1. Specification and Data
2. Estimation Results and Robustness
3. Contribution to Inflation Dynamics
III. Shifts in the Phillips Curves
IV. Conclusion
Annex I. Data Sources
Annex II. Results for Headline inflation
References
FIGURES
1. Inflation Developments in Europe
2. Contribution to Inflation Dynamics
3. Coefficients from Rolling Regressions
A1. Contribution to Inflation Dynamics: Headline inflation
TABLES
1. Benchmark Phillips Curve Estimation
2. Robustness Checks: Phillips Curve Estimation
3. Phillips Curve: Pre vs Post Covid Period
4. Philipps Curve: High vs Low Inflation Period
A1. Data Sources
A2. Benchmark Phillips Curve Estimation: Headline inflation
A3. Phillips Curve for Headline Inflation: Pre vs Post Covid Period
A4. Philipps Curve for Headline Inflation: High vs Low Inflation Period
We are grateful to Jörg Decressin and Alfred Kammer for their guidance and support, and acknowledge valuable contributions by Philipp Engler, Svitlana Maslova, Jorge Salas, and Magnus Saxegaard. Chun Jin, Claire Li, Sabiha Mohona, and Ben Park provided outstanding research assistance. Staff of the IMF provided helpful comments via the internal review process, seminars and surveillance meetings.