Inflation convergence in the euro area: just another gimmick?
Purpose - The Maastricht inflation criterion has influenced the choice of disinflation strategies of prospective euro area member countries. Some historically high-inflation countries chose the fiat disinflation strategy of “low inflation now, reforms later,” bringing inflation down quickly. Their inflation rates increased immediately after their euro applications were assessed positively and stayed significantly higher than inflation in France and Germany, two historically low-inflation countries. The inflation differentials reflect both structural rigidities inherited from the past and higher inflation expectations stemming from the chosen disinflation strategy. This paper seeks to address these issues. Design/methodology/approach - The paper highlights the inflation consequences of the choice of compliance policies with the Maastricht inflation criterion. To this end, the paper estimates costs of future disinflations in six high-inflation countries for which well-established stylized facts are held. Findings - The Maastricht inflation criterion has been an influential nominal rule. While it swayed the public stance toward low inflation, it biased the choice of the disinflation strategy toward fiat measures. Inflation in these countries declined only temporarily, giving these countries a pronounced Originality/value - The paper highlights the long-run inflation consequences of the choice of compliance policies with the Maastricht inflation criterion. While inflation was low prior to the euro and stayed low afterward in inflation-averse countries, a
Volume (Year): 1 (2009)
Issue (Month): 4 (November)
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