Explaining Inflation Differentials in the Euro Area: Evidence from a Dynamic Panel Data Model

Julien Licheron

Economie Internationale, 2007, issue 112, 73-97

Abstract: We try to explain the differences in euro area countries’ inflation rates over the period 1999-2006, using a dynamic panel data model. Our results suggest that euro area inflation differentials are partly due to differences in the exposure to exchange rate deviations and oil price shocks. They are also the reflection of remaining cyclical asymmetries amplified by a rather high degree of inflation persistence. On the other hand, “convergence factors”, namely the price convergence process and the Balassa-Samuelson effects, do not seem to have played a key role in driving inflation differentials in the EMU since 1999. We conclude by emphasizing the potential consequences of such long-lasting inflation differentials on diverging trends in relative competitiveness of the EMU member countries.

Keywords: Inflation differentials; inflation persistence; Economic and Monetary Union (EMU); dynamic panel data models (search for similar items in EconPapers)
JEL-codes: E31 E32 E58 (search for similar items in EconPapers)
Date: 2007
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Citations: View citations in EconPapers (4)

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