Drivers of Low Inflation in Malta after the Crisis
Abstract
Despite robust growth, inflation in Malta has been subdued after the crisis and lower than what a Phillips curve would imply. This study examines the determinants of low inflation by comparing inflation forecasts conditioning on three groups of variables – real activity, external and financial – to see which one of these categories best explains post-crisis inflation. The analysis is conducted within a Bayesian VAR (BVAR) framework over two different disinflation periods, the first one starting in mid-2008 and the other one in 2012. For Malta, forecasts conditional on the path of the external variables are the closest to the actual path of inflation in both periods. On the contrary, in the euro area, the first episode was driven by external factors but domestic factors played a more important role in the second one. This point to the significant cross-country heterogeneity among euro area countries even in the face of apparently similar patterns in headline inflation.References
[2] Alvarez, L., Gomes Loscos, A., and Urtasun, A. 2015. Asymmetries in the relationship between inflation and activity. Banco de Espana Economic Bulletin, November 2015.
[3] Ball, L., and Mazumder, S. 2011. Inflation Dynamics and the Great Recession. Brookings Papers on Economic Activity, 42(1): 337-405. Available at: http://dx.doi.org/10.1353/eca.2011.0005
[4] Blanchard, O., Cerutti, E., and Summers, L. H. 2015. Inflation and Activity: Two Explorations and Their Monetary Policy Implications. International Monetary Fund Working Paper WP/15/230.
[5] Ciccarelli, M., and Mojon, B. 2010. Global Inflation. The Review of Economics and Statistics, 92(3):524-535. Available at: http://dx.doi.org/10.1162/REST_a_00008
[6] Constancio, V. 2014. Maintaining Price Stability in The Euro Area. Speech at the 18th Annual Central Bank and Investment Authority Seminar organized by Commerzbank, 16 October 2014.
[7] Constancio, V. 2015. Understanding inflation dynamics and monetary policy. Speech at the Jackson Hole Economic Policy Symposium, 29 August 2015.
[8] Gatt, W. 2015. The Phillips curve in the Maltese economy. Central Bank of Malta Quarterly Review, 3.
[9] Grech, A. G. 2015. Understanding the macroeconomic impact of migration in Malta. Central Bank of Malta Policy Note, November 2015.
[10] Jarocinski, M., and Bobeica, E. 2016. Drivers of Euro Area Inflation since the Crisis. European Central Bank mimeo.
[11] Jarocinski, M., and Smets, F. 2008. House prices and the stance of monetary policy. Saint Louis Fed Economic Review, 90(4): 339-65. Available at: http://EconPapers.repec.org/RePEc:fip:fedlrv:y:2008:i:jul:p:339-366:n:v.90no.4
[12] Litterman, R. B. 1979. Techniques of Forecasting using Vector Autoregressions. Working Papers 115, Federal Reserve Bank of Minneapolis.
[13] Micallef, B. 2013. Inflation differentials in a monetary union: the case of Malta. Central Bank of Malta Working Paper WP/05/2013.
[14] Micallef, B. 2015. Estimating the impact on potential output of structural reforms to increase the female participation rate. Central Bank of Malta Policy Note, November 2015.
[15] Micallef, B., and Ellul, R. 2013. Estimating Inflation Persistence in Malta. Central Bank of Malta Quarterly Review, 2.
[16] Oinonen, S., and Paloviita, M. 2014. Updating the euro area Phillips curve: the slope has increased. Bank of Finland Research Discussion Paper No. 31.
[17] Riggi, M., and Venditti, F. 2015. Failing to forecast low inflation and Phillips curve instability: A euro-area perspective. International Finance, 18(1): 47-68. Available at: http://dx.doi.org/10.1111/1468-2362.12062
[18] Sims, C. A., and Zha, T. 1998. Bayesian methods for dynamic multivariate models. International Economic Review, 39(4): 949-68. Available at: http://www.jstor.org/stable/2527347
[19] Sims, C. A., Stock, J.H., and Watson, M.W. 1990. Inference in linear time series models with some unit roots. Econometrica, 58 (1): 113-14. Available at: http://www.jstor.org/stable/2938337
Keywords
The Copyright Transfer Form to ASERS Publishing (The Publisher)
This form refers to the manuscript, which an author(s) was accepted for publication and was signed by all the authors.
The undersigned Author(s) of the above-mentioned Paper here transfer any and all copyright-rights in and to The Paper to The Publisher. The Author(s) warrants that The Paper is based on their original work and that the undersigned has the power and authority to make and execute this assignment. It is the author's responsibility to obtain written permission to quote material that has been previously published in any form. The Publisher recognizes the retained rights noted below and grants to the above authors and employers for whom the work performed royalty-free permission to reuse their materials below. Authors may reuse all or portions of the above Paper in other works, excepting the publication of the paper in the same form. Authors may reproduce or authorize others to reproduce the above Paper for the Author's personal use or for internal company use, provided that the source and The Publisher copyright notice are mentioned, that the copies are not used in any way that implies The Publisher endorsement of a product or service of an employer, and that the copies are not offered for sale as such. Authors are permitted to grant third party requests for reprinting, republishing or other types of reuse. The Authors may make limited distribution of all or portions of the above Paper prior to publication if they inform The Publisher of the nature and extent of such limited distribution prior there to. Authors retain all proprietary rights in any process, procedure, or article of manufacture described in The Paper. This agreement becomes null and void if and only if the above paper is not accepted and published by The Publisher, or is with drawn by the author(s) before acceptance by the Publisher.