This paper illustrates a strong deg

This paper illustrates a strong degree of comovement between inflation and output in the euro
area. Underlying inflation, defined as an asymmetric trimmed mean, lags the output at business
cycle frequencies on average by one quarter, being roughly twice less volatile than output.
The coherence of output and underlying inflation at business cycle frequencies lies in the
range 0.6–0.9.
The close comovement of output and inflation is highly suggestive of the dominance of demand
factors in the euro area business cycle. Structural models that do not capture the comovement
between output and inflation at business cycle frequencies will have a hard time interpreting
euro area developments. Various flavors of technology shocks in recent general equilibrium
models just will not do, since they imply a negative comovement of output and inflation. That
being said, we do not deny that numerous supply-side and policy factors shape the dynamics
of the economy at low and high frequencies.