Inflationary shocks in Germany: A common trends analysis [Inflationäre Schocks in Deutschland: Eine Common Trends Analyse]

This paper analyses the inflation rate in Germany by means of a common trends model. Starting from an IS-LM model of the open economy, we conduct a cointegration analysis from which we obtain plausible long-run relationships. In the next step, we identify structural shocks with permanent and transitory effects and study their impacts on the inflation rate. We find that permanent supply shocks increase long-run inflation while transitory supply shocks temporarily decrease the inflation rate. Negative inflation expectation shocks clearly have a disinflationary effect in the medium and long run.