Inflation and Inflation Uncertainty in the Euro Area

Chart 3. Inflation-unemployment cross-plot

Unemployment

3.2 Trend Inflation, Steady-State Inflation and Inflation Persistence

Our benchmark univariate model of the inflation process regresses current inflation on
a constant term and three lags of both inflation and the unemployment rate. A
Bayesian approach is taken for the estimation. We start from an appropriate but
weakly informative prior, and use the 1980s as a pre-sample to update it. We report
the results from 1990m1 onwards, therefore including the period immediately before
the Maastricht Treaty, the convergence period to meet the requirements of the Treaty,
and the first decade of EMU. After the estimation, and in order to check whether there
is time variation in the relevant parameters of the models, we perform ADF tests on
trend inflation, inflation persistence and the sum of the coefficients of unemployment.

Table 1. Tests for time variation

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