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Inflation Differentials in the EU; A Common (Factors) Approach with Implications for EU8 Euro Adoption Prospects

International Monetary Fund
Authors registered in the RePEc Author Service: Franziska Ohnsorge

No 08/21, IMF Working Papers from International Monetary Fund

Abstract: This paper explores inflation determinants within the EU and implications for new members' euro adoption plans. Factor analysis partitions observed inflation in EU25 countries into common-origin and country-specific (idiosyncratic) components. Cross-country differences in common-origin inflation within the EU are found to depend on gaps in the initial price level, changes in the nominal effective exchange rate, the quality of institutions, and the economy's flexibility. Idiosyncratic inflation is generally small in magnitude. Nonetheless, the results show that country-specific shocks have systematically pushed down headline inflation, potentially influencing the assessment of compliance with the Maastricht inflation criterion.

Keywords: Euro Area; Globalization; Inflation; Trade; generalized dynamic factors model, euro adoption, central bank, price level, monetary policy, relative price, (search for similar items in EconPapers)
Pages: 39
Date: 2008-01-01
New Economics Papers: this item is included in nep-cba, nep-eec, nep-mac and nep-mon
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