Fast micro and slow macro: Can aggregation explain the persistence of ination?

We estimate a dynamic factor model for 404 disaggregate ination series of the euro area CPI between 1985 and 2003. We then aggregate back the 404 estimated micro level ination equations and decompose the dynamics of this aggregate into the e¤ects of the common and the idiosyncratic shocks. First, we \u85nd that one common factor accounts for 30 % of the overall variance of the 404 ination series. Second, the propagation mechanism of this common shock is highly heteroge-nous across sub-indices. Third, the aggregation exercise, which mim-ics remarkably well the persistence observed in the aggregate ination, demonstrates how the fast average micro adjustments translate into This paper would not have been possible without the kind help of a few individu-als and the goodwill of their institution. We are extremely grateful to Laurent Baudry