Euro Area Inflation Differentials

Ignazio Angeloni () and Michael Ehrmann

The B.E. Journal of Macroeconomics, 2007, vol. 7, issue 1, 36

Abstract: We build a stylised 12-country model of the euro area and use it to analyse how differences in national inflation and growth rates arise within the European Economic and Monetary Union (EMU). We find that the main source of differentials in the early years of the EMU have been aggregate demand shocks, followed by cost-push shocks; euro exchange rate shocks come third. Among the propagation mechanisms a key role is played by inflation persistence; for plausible parameter values even small changes in persistence can produce a dramatic increase in the differentials. Finally, we also find that a tight control of average area-wide inflation around a target tends to reduce the differentials as well.

Keywords: currency union; inflation differentials; inflation persistence; euro area (search for similar items in EconPapers)
Date: 2007
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Citations: View citations in EconPapers (105)

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Working Paper: Euro area inflation differentials (2004)
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DOI: 10.2202/1935-1690.1509

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