New study reveals key predictor of inflation in Euro Area
The study estimated a premium that entrepreneurs pay on their loans in the Euro Area using a model with financial frictions. The premium is a powerful predictor of inflation and is highly correlated with available proxies for it. The model with financial frictions better describes Euro Area data than the model without them, even though the accelerator effect is not statistically significant. The estimated premium is not necessarily counter-cyclical, depending on the shock considered.