Inflation Persistence Network (IPN):
General Purpose of the Inflation Persistence Network

The Heads of Research of the ECB and the National Central Banks belonging to the Eurosystem agreed that improving the understanding of the patterns and determinants of inflation persistence is of a common interest to the Eurosystem and could benefit from a Eurosystem collaboration, since it requires knowledge about the national economies and data. It was agreed that the Inflation Persistence Network (IPN) should focus on the following questions:

1. Existence and characterisation of nominal rigidities in the euro area. Is there any direct evidence on price rigidities in the euro area? Are nominal rigidities predominantly symmetric or does the evidence favour the existence of downward stickiness? Are there differences across sectors and/or across countries?
2. Determinants of nominal rigidities. Can we discriminate among the most likely sources of price stickiness? Are these sources similar to those found for other countries? Can we identify any clear pattern behind differences across countries, products and/or sectors in the degree of price stickiness?
3. Empirical testing of alternative price setting models. Which models perform best in reproducing the dynamic behaviour of inflation in the euro area? How do alternative models compare in terms of their ability to fit the degree of inertia found in euro area inflation? Which factors beyond nominal rigidities are needed to explain this inflation persistence? Can we identify the role of monetary policy (i.e., the monetary policy strategy and credibility, and inflation expectations) for the dynamics of inflation?

For this purpose, the IPN has availed itself of an unprecedented data set, covering a large amount of information on macroeconomic and sectoral variables and on price-setting behaviour at the individual firm level. On the one hand, the individual price records underlying the construction of both consumer and producer price indices have been made available in a large number of euro area countries, often covering a large fraction of the total databases constructed by the National Statistical Institutes. On the other hand, the IPN has conducted surveys on price setting behaviour in nine countries of the euro area. Taken together, these databases constitute a unique opportunity to understand the behaviour of price setters. They are unprecedented even in an international comparison, as the coverage of data available to the IPN extends beyond what is available for other economies.