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Euro Area Inflation Differentials

  • Angeloni Ignazio


    (Ministero dell’Economia e delle Finanze)

  • Ehrmann Michael


    (European Central Bank)

We build a stylised 12-country model of the euro area and use it to analyse how differences in national inflation and growth rates arise within the European Economic and Monetary Union (EMU). We find that the main source of differentials in the early years of the EMU have been aggregate demand shocks, followed by cost-push shocks; euro exchange rate shocks come third. Among the propagation mechanisms a key role is played by inflation persistence; for plausible parameter values even small changes in persistence can produce a dramatic increase in the differentials. Finally, we also find that a tight control of average area-wide inflation around a target tends to reduce the differentials as well.

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Article provided by De Gruyter in its journal The B.E. Journal of Macroeconomics.

Volume (Year): 7 (2007)
Issue (Month): 1 (August)
Pages: 1-36

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Handle: RePEc:bpj:bejmac:v:7:y:2007:i:1:n:24
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  1. Batini, Nicoletta & Nelson, Edward, 2000. "Optimal Horizons for Inflation Targeting," Working Paper Series 103, Sveriges Riksbank (Central Bank of Sweden).
  2. Batini, Nicoletta & Levine, Paul & Pearlman, Joseph G., 2004. "Indeterminacy with inflation-forecast-based rules in a two-bloc model," Working Paper Series 0340, European Central Bank.
  3. Pierpaolo Benigno & J. David López-Salido, 2002. "Inflation persistence and optimal monetary policy in the Euro Area," Banco de Espa�a Working Papers 0215, Banco de Espa�a.
  4. Angeloni,Ignazio & Kashyap,Anil K. & Mojon,Benoît (ed.), 2003. "Monetary Policy Transmission in the Euro Area," Cambridge Books, Cambridge University Press, number 9780521828642, October.
  5. Bergin, Paul R., 2003. "A model of relative national price levels under pricing to market," European Economic Review, Elsevier, vol. 47(3), pages 569-586, June.
  6. Ehrmann, Michael & Fratzscher, Marcel, 2002. "Interdependence between the euro area and the US: what role for EMU?," Working Paper Series 0200, European Central Bank.
  7. Benigno, Pierpaolo, 2004. "Optimal monetary policy in a currency area," Journal of International Economics, Elsevier, vol. 63(2), pages 293-320, July.
  8. Ignazio Angeloni & Anil K. Kashyap & Benoit Mojon & Daniele Terlizzese, 2003. "Monetary Transmission in the Euro Area: Does the Interest Rate Channel Explain it All?," NBER Working Papers 9984, National Bureau of Economic Research, Inc.
  9. Bayoumi, Tamim & Eichengreen, Barry, 1992. "Shocking Aspects of European Monetary Unification," CEPR Discussion Papers 643, C.E.P.R. Discussion Papers.
  10. Ignazio Angeloni & Gunter Coenen & Frank Smets, 2003. "Persistence, The Transmission Mechanism And Robust Monetary Policy," Scottish Journal of Political Economy, Scottish Economic Society, vol. 50(5), pages 527-549, November.
  11. Michael Ehrmann & Marcel Fratzscher, 2004. "Equal size, equal role? interest rate interdependence between the euro area and the United States," International Finance Discussion Papers 800, Board of Governors of the Federal Reserve System (U.S.).
  12. Mojon, Benoît & Angeloni, Ignazio & Terlizzese, Daniele & Kashyap, Anil K., 2003. "The output composition puzzle: a difference in the monetary transmission mechanism in the euro area and U.S," Working Paper Series 0268, European Central Bank.
  13. Javier Andrés & Eva Ortega & Javier Vallés, 2003. "Market structure and inflation differentials in the European Monetary Union," Banco de Espa�a Working Papers 0301, Banco de Espa�a.
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