A1810
Title: The risk of inflation dispersion in the Euro area
Authors: Stephane Lhuissier - Banque de France (France) [presenting]
Fabien Tripier - University of Evry (France)
Aymeric Ortmans - Universite Paris-Saclay (France)
Abstract: The cross-country dispersion of inflation risks in the euro area and their macroeconomic origins are explored. The approach builds on the concept of inflation-at-risk developed, which is itself highly related to that of Growth-at-Risk. The inflation risk approach aims at forecasting shifts in the tails of inflation distribution. An in-depth analysis of inflation-at-risk in the euro area and the U.S. grounded has been recently provided on a quantile Phillips curve. We are not interested in the inflation risk for one country per see, but in the dispersion of these risks between euro area countries. We document five facts. (i) While the dispersion of inflation rates mainly concerns upside inflation risks during the first decade of the euro area, it shifted to downside inflation risks during the second decade. (ii) The dispersion of downside and upside risks to inflation reaches record levels in the wake of the COVID crisis. (iii) The main determinant of the dispersion at the bottom of the distribution is the development of financial stress. (iv) In the wake of the COVID crisis, value chain pressures drove the dispersion of inflation risks. (v) Overall, the dispersion of inflation rates is largely caused by heterogeneous Phillips curves between countries rather than by different national economic contexts.