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Convergence of inflation: A necessary prerequisite for EMU?

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  • Paolo Giovane
  • Lorenzo Bini-Smashi

Abstract

This article assesses the rationale for inflation convergence as a major criterion for the passage to the final stage of Economic and Monetary Union (EMU). A simple two-country model is developed to examine the effects of the change in regime under different hypotheses concerning agents' expectations. The results suggest that, in the absence of convergence, the move to EMU is likely to produce spillover effects from the high-inflation to the low-inflation country. The latter, therefore, has a strong incentive to request strict convergence criteria for inflation before moving to EMU. Copyright Kluwer Academic Publishers 1996

Suggested Citation

  • Paolo Giovane & Lorenzo Bini-Smashi, 1996. "Convergence of inflation: A necessary prerequisite for EMU?," Open Economies Review, Springer, vol. 7(2), pages 117-126, April.
  • Handle: RePEc:kap:openec:v:7:y:1996:i:2:p:117-126
    DOI: 10.1007/BF01891899
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    References listed on IDEAS

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    1. Barro, Robert J. & Gordon, David B., 1983. "Rules, discretion and reputation in a model of monetary policy," Journal of Monetary Economics, Elsevier, vol. 12(1), pages 101-121.
    2. Bibi-Smaghi, L. & Padoa-Schioppa, T. & Papadia, F., 1995. "The Transition to EMU in the Maastricht Treaty," Princeton Studies in International Economics 194, International Economics Section, Departement of Economics Princeton University,.
    3. Miller, Marcus & Sutherland, Alan, 1991. "The "Walters Critique" of the EMS--A Case of Inconsistent Expectations?," The Manchester School of Economic & Social Studies, University of Manchester, vol. 59(0), pages 23-37, Supplemen.
    4. Giavazzi, Francesco & Spaventa, Luigi, 1990. "The `New' EMS," CEPR Discussion Papers 369, C.E.P.R. Discussion Papers.
    5. Eichengreen, Barry, 1993. "European Monetary Unification," Journal of Economic Literature, American Economic Association, vol. 31(3), pages 1321-1357, September.
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    Cited by:

    1. Gambacorta, L., 1999. "What Is the Optimal Institutional Arrangement for a Monetary Union?," Papers 356, Banca Italia - Servizio di Studi.

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