Determinants of inflation differentials in the euro area: Is the New Keynesian Phillips Curve enough?

In the euro area, inflation rates diverged after the creation of the single currency, and started to converge again after mid 2002. Against this background, this paper studies the determinants of inflation differentials in the euro area. We start by using the New Keynesian Phillips Curve (NKPC) to explain inflation differences for a panel of countries. It is found that expected inflation and exchange rate movements are important in causing diverging inflation dynamics, while lagged inflation and exchange rates dynamics are not. Moreover, the Incomplete Competition Model (ICM) adds explanatory power to the NKPC in describing inflation dynamics across countries. Not only the former model is not encompassed by the latter, but also the variables proposed by the ICM turn out as significant: the growth of nominal Unit Labour Cost and the long-run disequilibrium between prices and costs explain inflation differentials.FC

Inflation dynamics in open economies: empirical evidence for G7 countries on the role of import prices and the cost channel

The supply side effects of nominal interest rate and import prices on inflation are very important for the design of monetary policy. However, the empirical identification of the cost channel has ignored import prices. We start by developing a model which shows that ignoring import prices in the estimation of the cost channel may lead to wrong results. Taking this into account, we study the empirical relevance of the cost channel and import prices using the New Keynesian Phillips Curve (NKPC) for the G7 countries. In order to introduce import prices in the NKPC, we test several ways in which imports can affect inflation. It is assessed if imports should be treated as inputs and/or consumption goods, and also if there is immediate or slow exchange rate passthrough. Finally, besides the traditional concept of cost channel, where wages are paid in advance, it is tested whether is relevant to extend the cost channel assuming that imports of final consumption goods are also paid in advance. Empirical results indicate that the cost channel is present in imported consumption good and open economy variables play an important role in explaining inflation dynamics.FCT - SFRH/BD/27973/2006

Inflation dynamics in open economies: empirical evidence of G7 countries on the role of imports prices and the cost channel

The supply side effects of both the nominal interest rate (. i.e., the cost channel) and import prices on inflation are very important for the design of monetary policy. However, the empirical identification of the cost channel (traditionally associated with the advance payment of wages) has ignored import prices. We start by deducting a New Keynesian Phillips Curve (NKPC) which shows that ignoring import prices in the estimation of the cost channel may lead to incorrect results. Taking this into account, we study the empirical relevance of the cost channel and import prices using the NKPC for the G7 countries. We test whether the estimation of the cost channel is affected when the price of imported inputs is considered; if it is relevant to extend the cost channel given that imports of final consumption goods are also paid in advance; if imports should be treated as inputs and/or consumption goods, and if there is an immediate or slow exchange rate pass-through. Empirical results indicate that the cost channel is present in imported consumption goods in particular, and import prices play an important role in explaining inflation dynamics.info:eu-repo/semantics/acceptedVersio

Determinants of inflation differentials in the euro area: is the New Keynesian Phillips Curve enough?

In the euro area, inflation rates diverged after the creation of the single currency, and started to converge again from mid-2002. It is against this background that the paper studies the determinants of inflation differentials in the euro area. We start by using the New Keynesian Phillips Curve (NKPC) to explain inflation differences for a panel of countries. Exchange rate movements and expected inflation in particular play an important part in bringing about diverging inflation dynamics, while lagged inflation does not. The Incomplete Competition Model (ICM) adds explanatory power to the NKPC in describing inflation dynamics across countries. The latter model does not encompass ICM, and the variables proposed by the ICM are statistically significant: the growth in nominal Unit Labour Cost and the long-run disequilibrium between prices and costs explain inflation differentials

Flight-to-quality and contagion in the european sovereign debt crisis: the cases of Portugal and Greece

This work aims to analyze the co-movements between the Portuguese, Greek, Irish and German government bond markets after the subprime crisis (2007 to 2013). Additionally, it aims to test the existence of contagion between the Portuguese, Greece and Irish bond markets, and to explore the phenomenon of flight-to-quality from the Portuguese and Greek bond markets to the German market. The analysis is undertaken using a DCC-IGARCH model with daily data for the 10 year yields government bonds. Results suggest the existence of contagion between the Greek and the Portuguese markets, and to a lesser extent between the Irish and the Portuguese markets. The correlation between the Portuguese and Greek yields at the end of the analyzed period indicates the non-existence of decoupling between the two countries. During most of the identified crisis periods, flight-to-quality flows are evident from the Portuguese and Greek bond markets to the German market.FC

Functional income distribution in a small European country: The role of financialisation and other determinants

JEL CLASSIFICATION C22, D33, E25 and E44This paper makes an empirical analysis of the relationship between financialisation and the evolution of labour income share in Portugal from 1978 to 2012. We estimate an equation for the labour income share that includes standard variables (technological progress, globalisation, education and business cycle) and variables to capture the effect of financialisation. We formulate the hypothesis that the financialisation process may lead to a rise in the inequality of functional income distribution through three channels: the change in the sectorial composition of the economy (due to the increase in the weight of the financial activity and the decrease in government activity), the diffusion of shareholder value governance practices and the weakening of trade unions. Our results show that there is a long-term relationship between all variables and that the financialisation process indirectly affects the labour income share through its impact on government activity and trade union density. The paper also finds evidence supporting the traditional explanations for functional income distribution, namely globalisation, education and business cycle.FC

On the Price of German Treasury Bills

In this paper, we examine the primary and secondary markets for German treasury bills. We look in great detail at the rationale behind banks’ decisions concerning the yield they require to be willing to buy treasury bills in the primary market; and we also mention the reasoning behind household and nonbank firm decisions concerning the price they are willing to pay to buy these bills in the secondary market. We use data from real world tenders to show that the bids set by banks conform to what our theoretical framework would predict. In particular, we show that current monetary policy and the markets’ expectations regarding its future path can be used to define a range where the banks bids lie.FC

Industry-and occupation-specific skills of displaced workers

The role of marketable skills of workers has been the core focus of the human capital framework. Individuals accumulate skills that enhance their productivity and earnings, but sometimes they are forced to change their professional careers and find new jobs. This paper uses Portuguese linked employer-employee data – Quadros de Pessoal - and explores the relevance of industry and occupation specific skills by looking at the wage losses of displaced workers due to firms shutting down. Our empirical analysis considers the four alternatives that workers face after displacement namely changing both industry and occupation; changing industry and staying in the same occupation; changing occupation but staying in the same industry, or staying in the same industry and occupation. Empirical evidence suggests that for workers who switch industry/occupation, pre-displacement industry/occupation tenure implies a larger wage loss than for industry/occupation stayers. In a context of rising unemployment, our analysis allows us to suggest that when experienced workers are displaced and forced to find a job in a different industry, they suffer considerable wage cuts.FC

Financialisation and inequality in the semi-periphery: Evidence from Portugal

Despite being a disputed concept in the literature, financialisation broadly refers to the growing weight of finance in modern economies. This chapter looks at how the evolution of inequality in Portugal is related to financialisation. It analyses functional income distribution, looking at the wage share and rentier income. The chapter focuses on personal income distribution and poverty. It approaches briefly other effects of financialisation and other factors explaining functional and personal income inequality and poverty. Wage inequality is relevant to analyse the distribution of income before state intervention with taxes and social policies. When analysing income inequality, the focus is on relative differences between households, without concern for poverty, that is, for the incapacity of some households for having a minimum income that ensures an ordinary living pattern. In conclusion, the Portuguese experience shows that the financialisation process has some direct and indirect effects on income inequality.info:eu-repo/semantics/acceptedVersio

Inflation and business cycle convergence in the euro area: Empirical analysis using an unobserved component model

The optimum currency area literature highlights that large inflation differentials can undermine a monetary union. In the euro area, inflation rates diverged after the creation of the single currency, and started to converge again after mid 2002. Another point suggested by the literature is that business cycles are an important determinant of inflation differences across countries. Against this background, we assess the convergence of inflation rates and business cycles in the euro area and study the relationship between them. The analysis is done using unobserved component model estimated with the Kalman filter. In general, from 1980 to 2008, inflation rates and business cycles have become more aligned in the euro area. It is found that output gap is better than unit labour costs as an indicator of business cycle when studying convergence. We also conclude that inflation rates have converged faster than output gaps. When looking at the causality between the convergence of these two variables, it is found that the destabilising impact of inflation divergence is limited.FC