We provide evidence on the fit of the New Phillips Curve (NPC) for the Euro area
over the period 1970-1998, and use it as a tool to compare the characteristics of
European inflation dynamics with those observed in the U.S. We also analyze the factors
underlying inflation inertia by examining the cyclical behavior of marginal costs,
as well as that of its two main components, namely, labor productivity and real wages.
Some of the findings can be summarized as follows: (a) the NPC fits Euro area data
very well, possibly better than U.S. data, (b) the degree of price stickiness implied
by the estimates is substantial, but in line with survey evidence and U.S. estimates,
(c) inflation dynamics in the Euro area appear to have a stronger forward-looking
component (i.e., less inertia) than in the U.S., (d) labor market frictions, as manifested
in the behavior of the wage markup, appear to have played a key role in shaping the
behavior of marginal costs and, consequently, inflation in Europe.
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