Exchange Rates and Inflation under EMU: An Update
AbstractIn our recent Economic Policy article(Honohan and Lane, 2003), we argued that the strength of the US dollar 1999-2001 had an important impact on inflation divergence within the EMU and in particular the surge in Ireland’s inflation to over 7 per cent. This hypothesis has been subjected to a grueling out-of-sample test: would the dollar’s subsequent weakness contribute to inflation convergence and in particular to a fall in Irish inflation? Fortunately for us, the theory has passed the test with flying colours. Irish inflation stopped dead in its tracks: consumer prices were unchanged between May and November of 2003. Regression analysis on quarterly inflation data across EMU members 1999.1-2004.1 confirms the importance of the exchange rate channel, although pinning down the exact dynamic specification will require a further span of data.
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Bibliographic InfoPaper provided by IIIS in its series The Institute for International Integration Studies Discussion Paper Series with number iiisdp031.
Date of creation: 28 Jan 2005
Date of revision:
Other versions of this item:
- E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
- E42 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Monetary Sytsems; Standards; Regimes; Government and the Monetary System
- F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics
This paper has been announced in the following NEP Reports:
- NEP-ALL-2005-04-30 (All new papers)
- NEP-CBA-2005-04-30 (Central Banking)
- NEP-EEC-2005-04-30 (European Economics)
- NEP-IFN-2005-04-30 (International Finance)
- NEP-MON-2005-04-30 (Monetary Economics)
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Angeloni Ignazio & Ehrmann Michael, 2007.
"Euro Area Inflation Differentials,"
The B.E. Journal of Macroeconomics,
De Gruyter, vol. 7(1), pages 1-36, August.
- Patrick Honohan & Philip R. Lane, 2003.
"Divergent inflation rates in EMU,"
CEPR & CES & MSH, vol. 18(37), pages 357-394, October.
- Philip R. Lane, & Patrick Honohan, 2003. "Divergent Inflation Rates in EMU," The Institute for International Integration Studies Discussion Paper Series iiisdp05, IIIS.
- Philip R. Lane & Patrick Honohan, 2003. "Divergent Inflation Rates in EMU," Trinity Economics Papers 20034, Trinity College Dublin, Department of Economics.
- Papell, David H., 2006. "The Panel Purchasing Power Parity Puzzle," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 38(2), pages 447-467, March.
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