Modelling French inflation: a macrosectoral approach

Kévin Milin

Documents de travail
No G2017/08
Paru le :Paru le21/11/2017
Kévin Milin
Documents de travail No G2017/08- November 2017

This paper aims at presenting a macrosectoral model for French inflation. The macroeconometric model focuses on four main equations: value added prices, wages, intermediate consumption prices, and production prices. It provides consistent forecasts, consequently used to forecast underlying consumption prices. This model uses error correction modelling and has a few original characteristics compared to more standard frameworks. For example, intermediate consumption prices and production prices in the energy sector are treated apart, for a better control of oil prices volatility. Another original feature is to use value added prices as a wage deflator: this way, terms-of-trade effects are directly taken into account in the wage equation.

Reaction functions have been simulated for several macroeconomic shocks: a 20% increase in oil prices, a 10% depreciation of the euro compared to others currencies, a 10% rise in agricultural and industrial raw materials, and 1% positive shocks on productivity, unemployment, taxes on production, operation grants, and the social contribution rate. All the impacts of exogenous shocks described in this paper should however be used cautiously, because second round effects on real supply and real demand are omitted in this framework.