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I investigate the dynamics of core inflation in Italy, with a special focus on the decline that started in 2012 and the ensuing low-inflation period. Novel composite indicators of labour and financial market conditions are constructed and employed in a factor-augmented Phillips curve framework. Several findings follow. The Phillips curve, apparently dead when based on the unemployment gap or the output gap, is instead correctly underpinned when slack is extracted from the labour market composite indicator: the underlying large set of variables is beneficial for conditionally forecasting core inflation. Second, financial market composite indicators help to better characterize core inflation dynamics in times of unconventional monetary policy and when considering their interactions with economic slack. Third, a steepening of the Phillips curve is evident after 2008, before a stabilization is observed in 2016. These results can inform monetary authorities in their quest for sustained adjustment in the path of inflation.

On the Stability of Euro Area Money Demandand its Implications for Monetary PolicyFebruary 27, 2018AbstractWe employ a recent time-varying cointegration test to revisit the usefulness of long-runmoney demand equations for the ECB, addressing the issue of their instability by meansof a model evaluation exercise. Building on the results, we make a twofold contribution.First, we propose a novel stable money demand equation relying on two crucial factors:a speculative motive, represented by domestic and foreign price-earnings ratios, and aprecautionary motive, measured by changes in unemployment. Second, we use the modelto derive relevant policy implications for the ECB, since excess liquidity looks more usefulfor forecasting stock market busts than future inflation. Overall, this evidence pointsto (i) a possible evolution of the monetary pillar in the direction of pursuing financialstability and (ii) the exclusion of a sudden liquidity–driven inflationary burst after theexit from the prolonged period of unconventional monetary measures.

We evaluate the role of US monetary policy in shaping inflation and economic activity by means of a medium-scale Bayesian VAR model, where the ZLB and the unconventional measures are addressed by using a shadow interest rate. The historical decomposition and a conditional forecast scenario show that the FED’s stance is in line with GDP and inflation dynamics. Moreover, core inflation will likely lie below its target in 2017.