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European Monetary Union and the Cost of Disinflation

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  • Sandeep Mazumder

Abstract

One of the unofficial goals of the formation of the European Monetary Union (EMU) was to enable member nations to keep inflation at a low and stable rate, while minimising the costs associated with trying to reduce the rate of inflation. This paper seeks to examine whether the formation of EMU has enabled the euro area countries to reduce the output losses that are associated with disinflations, which are captured by the sacrifice ratio. We find that the formation of EMU has not reduced the output costs of disinflation. Moreover, we find that the movement towards EMU following the Delors Report in 1989 coincides with greater output losses for eurozone countries that were undergoing disinflation. This suggests that EMU has not made it less costly for euro area countries to reduce their rates of inflation, and any achievement of price stability has only occurred at high cost.

Suggested Citation

  • Sandeep Mazumder, 2014. "European Monetary Union and the Cost of Disinflation," Economic Issues Journal Articles, Economic Issues, vol. 19(2), pages 1-20, September.
  • Handle: RePEc:eis:articl:214mazumder
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