Euro area inflation as a predictor of national inflation rates

Antonella Cavallo () and Antonio Ribba ()

Journal of Policy Modeling, 2014, vol. 36, issue 6, 1048-1065

Abstract: The stability of inflation differentials is an important condition for the smooth working of a currency area, such as the European Economic and Monetary Union. In the presence of stability, changes in national inflation rates, while holding Euro area inflation fixed contemporaneously, should be only transitory. If this is the case, the rate of inflation of the whole area can also be interpreted as a predictor, at least in the long-run, of the different national inflation rates. However, in this paper we show that this condition is satisfied only for a small number of countries, including France and Italy. Better convergence results for inflation differentials are, instead, found for the USA. Some policy implications are drawn for the Eurozone.

Keywords: Inflation differentials; Euro area; Structural cointegrated VARs; Permanent–transitory decompositions (search for similar items in EconPapers)
JEL-codes: C32 E31 (search for similar items in EconPapers)
Date: 2014
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Related works:
Working Paper: Euro area Inflation as a Predictor of National Inflation Rates (2013)
Working Paper: Euro area inflation as a predictor of national inflation rates (2012)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:jpolmo:v:36:y:2014:i:6:p:1048-1065

DOI: 10.1016/j.jpolmod.2014.09.004

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