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Inflation Differentials in the EU

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  • 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.

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Bibliographic Info

Paper provided by International Monetary Fund in its series IMF Working Papers with number 08/21.

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Length: 39
Date of creation: 01 Jan 2008
Date of revision:
Handle: RePEc:imf:imfwpa:08/21

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Related research

Keywords: Inflation; Trade; central bank; price level; monetary policy; relative price; inflation rates; monetary fund; low inflation; average inflation; relative prices; monetary union; inflation convergence; effective exchange rates; inflation rate; nominal interest rate; international monetary policy; monetary aggregate; inflation performance; national bank; average price level; distribution of inflation; real exchange rates; inflationary impact; european monetary union; measure of inflation; macroeconomic performance; inflation dynamics; price stability; annual inflation;

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References

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  1. Buiter, Willem H, 2005. "The 'Sense and Nonsense of Maastricht' Revisited: What Have We Learnt About Stabilization In EMU?," CEPR Discussion Papers 5405, C.E.P.R. Discussion Papers.
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Citations

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Cited by:
  1. Nagayasu, Jun, 2011. "Heterogeneity and convergence of regional inflation (prices)," Journal of Macroeconomics, Elsevier, vol. 33(4), pages 711-723.
  2. Ashoka Mody & Franziska Ohnsorge, 2007. "Can Domestic Policies Influence Inflation?," IMF Working Papers 07/257, International Monetary Fund.
  3. Emil Stavrev, 2009. "Forces Driving Inflation in the New EU10 Members," IMF Working Papers 09/51, International Monetary Fund.
  4. Nagayasu, Jun, 2010. "Regional Inflation (Price) Behaviors: Heterogeneity and Convergence," MPRA Paper 25430, University Library of Munich, Germany.

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