Does one monetary policy fit all? the determinants of inflation in EMU countries

Melisso Boschi () and Alessandro Girardi

MPRA Paper from University Library of Munich, Germany

Abstract: This chapter aims at assessing the long-run determinants and the short-run dynamics of inflation in each country belonging to the European Monetary Union (EMU). Our work complements the recent literature on this topic for the Euro Area as a whole. Detecting such determinants can be crucial in designing structural reforms acting as aside instruments of monetary policy in maintaining price stability. The empirical methodology consists of a reinterpretation of the structural cointegrating VAR approach, which allows for a structural long-run analysis of inflation determinants along with an accurate assessment of its short-run dynamics. The main conclusion emerging from the estimates is that not only the determinants of inflation differ in the countries belonging to the Euro Area, but also that cost-push factors have a considerable role in explaining inflation in most of the countries examined. As a policy implication, a tight monetary policy pursued in those countries whose inflation is mainly driven by costs would result in a contraction of economic activity without exerting relevant effects on price dynamics.

Keywords: Inflation; markup; EMU countries; long-run structural VARs; subset VEC models (search for similar items in EconPapers)
JEL-codes: C32 E00 E31 E37 (search for similar items in EconPapers)
Date: 2005
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Published in Current Politics and Economics of Europe 19.1/2(2008): pp. 31-62

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Persistent link: https://EconPapers.repec.org/RePEc:pra:mprapa:28554

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