The higher degree of price and wage rigidity in the euro area would suggest that output volatility should be significantly larger in the euro area than in the more flexible US economy. This would be particularly true during a period when the economy is subject to supply-side shocks, which are exerting simultaneously inflationary and recessionary influences.
Yet surprisingly, and despite the negative supply-side shocks that had been hitting the euro area economy over the years up to 2007, the data suggested that both inflation volatility and output volatility in the euro area were lower than elsewhere. Has the crisis changed this picture?