Frankfurt 2006

This dissertation comprises three essays that deal with the topic of inflation in the euro area. The aim of the first two essays is to estimate core inflation in the euro area. Different estimation appoaches are applied. The third essay investigates the impact of external shocks on euro area inflation.


The first essay presents a core inflation indicator for the euro area that is based on the structural vector autoregressive (VAR) approach. The specialty of this core inflation approach is its foundation in economic theory. The derived core inflation measure indicates a decline in underlying inflation in the euro area over the 1990s, which is followed by an increase in trend inflation since mid-1999. Some periods of occasionally quite substantial deviations between core and HICP inflation are identified.


The second essay core inflation in analysed by means of the generalized dynamic factor model. This approach features the favourable properties of summarising the information on the price trend contained in a large number of heterogeneous variables and to directly address different kinds of distortions that may cover the price trend. The result derived with this approach widely corroborate those of the structural VAR approach. The decline in core inflation over the year 1998 is reversed in the course of 1999 and stabilises in the midyear of 2000. Also the estimated pattern of deviation between HICP and core inflation is similar.


The third essay provides a comprehensive empirical analysis of the pass-through of external shocks (oil price, exchange rate, and import price shocks) to euro area inflation at different stages of the pricing chain (import, producer, and consumer prices). The analysis is based on a VAR model. Indentification is achieved both by applying a Choleski decomposition and a structural identification scheme. The resultw indicate that the pass-through is largest and fastest for import price shocks followed by exchange rate and oil price shocks. The size and speed of the pass-through of these shocks decline along the pricing chain. External shocks explain a large fraction of the variance of all price indices. Moreover, external shocks have been strong positive contributors to inflation in the euro area since 1999.


The book is published by Fritz Knapp Verlag, Frankfurt am Main (Germany) and is available at all bookstores (ISBN 3-8314-2610-4).


€ 22,--