MODELLING INFLATION IN THE EURO AREA
Eilev S. Jansen
The paper presents an incomplete competition model (ICM), where inflation
is determined jointly with unit labour cost growth. The ICM is estimated
on data for the Euro area and evaluated against existing models, i.e.
inflation equation of the Area Wide model (AWM) - cf. Fagan, Henry
and Mestre (2001) - and estimated versions of the (single equation) P*
and a hybrid New Keynesian Phillips curve.
The evidence from these comparisons does not invite decisive conclusions.
There is, however, some support in favour of the (reduced form) AWM inflation
equation. It is the only model that encompasses a general unrestricted
model and it forecast encompasses the competitors when tested on 20 quarters
of one step ahead forecasts.