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| We investigate drivers of Euro area inflation dynamics using a panel of regional Phillips curves and identify long-run inflation expectations by exploiting the crosssectional dimension of the data. Our approach simultaneously allows for the inclusion of country-specific inflation and unemployment-gaps as well as time-varying parameters. Our preferred panel specification outperforms various aggregate uni- and multivariate unobserved component models in terms of forecast accuracy. We find that declining long-run trend inflation expectations and rising inflation persistence indicate an altered risk of inflation expectations de-anchoring. Lower trend inflation and persistently negative unemployment-gaps a slightly increasing Phillips curve slope and the downward pressure of low oil prices mainly explain the low inflation rate during the recent years. |
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