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Mr. Yasser Abdih, Ms. Li Lin, and Anne-Charlotte Paret
Despite closing output gaps and tightening labor markets, inflation has remained low in the euro area. Based on an augmented Phillips Curve framework, we find that this phenomenon—sometimes attributed to low global inflation—has been primarily caused by a remarkable persistence of inflation, keeping it low despite the reduction in slack. This feature is shown to be specific to the euro area (in comparison with the United States). Monetary policy needs to stay accommodative to help guide inflation back to target.
Mr. Yasser Abdih, Ms. Li Lin, and Anne-Charlotte Paret

Despite closing output gaps and tightening labor markets, inflation has remained low in the euro area. Based on an augmented Phillips Curve framework, we find that this phenomenon—sometimes attributed to low global inflation—has been primarily caused by a remarkable persistence of inflation, keeping it low despite the reduction in slack. This feature is shown to be specific to the euro area (in comparison with the United States). Monetary policy needs to stay accommodative to help guide inflation back to target.

Klaus-Peter Hellwig
I regress real GDP growth rates on the IMF’s growth forecasts and find that IMF forecasts behave similarly to those generated by overfitted models, placing too much weight on observable predictors and underestimating the forces of mean reversion. I identify several such variables that explain forecasts well but are not predictors of actual growth. I show that, at long horizons, IMF forecasts are little better than a forecasting rule that uses no information other than the historical global sample average growth rate (i.e., a constant). Given the large noise component in forecasts, particularly at longer horizons, the paper calls into question the usefulness of judgment-based medium and long-run forecasts for policy analysis, including for debt sustainability assessments, and points to statistical methods to improve forecast accuracy by taking into account the risk of overfitting.
Mr. Yasser Abdih, Ms. Li Lin, and Anne-Charlotte Paret

Title Page IMF Working Paper Understanding Euro Area Inflation Dynamics: Why So Low for So Long? by Yasser Abdih, Li Lin, and Anne-Charlotte Paret 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. Copyright Page © 2018 International Monetary Fund WP/18/188 IMF Working Paper European Department

International Monetary Fund. European Dept.

); joined by D. Hardy (MCM), J. Franks, and C. Ebeke (both EUO); and observed by S. Meyer and B. Párkányi (both EURIMF) Front Matter Page CONJUNCTURE A. Recent Developments B. Baseline Outlook C. Risks Around the Baseline MONETARY POLICY RISK REDUCTION A. Fiscal Policies B. Structural Policies C. External Sector Policies D. Financial Sector Policies ARCHITECTURE A. Banking Union B. Capital Markets Union C. Fiscal Institutional Reforms STAFF APPRAISAL BOXES 1. Macroeconomic Impacts of Brexit 2. Understanding Euro Area

International Monetary Fund. European Dept.

and institutional reforms at the Member States and the EU level. Supporting domestic demand and strengthening the recovery The authorities underline that the Fund’s concern of a protracted period of slow growth and even stagnation is not a central scenario. Monetary policy and the outlook for price stability The authorities broadly share staff’s view on euro area inflation dynamics and outlook. At present, inflation is very low at 0.5% both in May and, according to the flash estimate, also in June 2014. Looking ahead, inflation is expected to remain at

Mr. Serhan Cevik
The post-pandemic rise in consumer prices across the world has renewed interest in inflation dynamics after decades of global disinflation. This paper contributes to the literature by providing a granular investigation of inflation persistence at the city level in Lithuania during the period 2000–2021, as well as a comparison of inflation persistence at the country level vis-àvis the eurozone over the same period. Using disaggregate monthly data collected in five major cities, the empirical analysis finds a mixed and ambiguous picture of inflation persistence. While the headline inflation does not appear to exhibit a high degree of persistence, most consumption categories have significant persistence. As a result, shocks may not remain transitory and instead have persistent effects that could spillover across subcomponents depending on the size of the shock.
Mr. Serhan Cevik

prices. References Abdih , Y. , L. Lin , and A-C. Paret ( 2018 ), “ Understanding Euro Area Inflation Dynamics: Why So Low for So Long? ” IMF Working Paper No. 18/188 ( Washington, DC : International Monetary Fund ). Andrews , D. , and H-Y. Chen ( 1994 ) “ Approximately Median-Unbiased Estimation of Autoregressive Models, ” Journal of Business & Economic Statistics , Vol. 12 , pp. 187 – 204 . Batini , N. ( 2006 ) “ Euro Area Inflation Persistence, ” Empirical Economics , Vol. 31 , pp. 977 – 1002 . Baum , C. , J. Barkoulas , and

Ms. Yuanyan S Zhang

effects are also significant, but not sufficient to outweigh the positive effect on wages from domestic labor market recovery. VII. References Abdih , Yasser , Lin Li , and Anne-Charlotte Paret , 2018 , “ Understanding Euro Area Inflation Dynamics: Why So Low for So Long ?” IMF Working Paper . Aiyar , Shekhar , et al , 2019 , “ Strengthening the Euro Area: The Role of National Structural Reforms in Enhancing Resilience ,” IMF Staff Discussion Note . Bell , David and David Blanchflower . 2018 , “ Underemployment in the US and

Peter D. Williams, Mr. Yasser Abdih, and Emanuel Kopp

. “ Understanding U.S. Wage Dynamics .” IMF Working Paper, WP/18/138 , International Monetary Fund . Abdih , Yasser , Li Lin , and Anne-Charlotte Paret . 2018 . “ Understanding Euro Area Inflation Dynamics: Why So Low for So Long? ” IMF Working Paper, WP/18/188 , International Monetary Fund . Adrian , Tobias; Richard K. Crump , and Emanuel Moench . 2013 . “ Pricing the Term Structure with Linear Regressions .” Journal of Financial Economics 110 , No. 1 ( October 2013 ): 110 – 38 Baxter , Marianne and Robert G. King , 1999