IDEAS home Printed from
   My bibliography  Save this paper

Eurozone inflation differentials and the ECB


  • PIROVANO, Mara
  • VAN POECK, André


This paper presents new evidence on inflation differentials in the Euro Area from different perspectives, and extending the sample including the recent financial crisis. First, we give an informal analysis of the evolution of inflation dispersion and inflation differentials since the start of EMU. Second, we perform formal statistical analyses of the stability properties of inflation differentials in the period 1999-2010. Univariate and multivariate tests reject the null of stability of inflation differentials when conducted over the entire sample period. However, when the financial crisis is excluded, the null of stability is not rejected for the large majority of countries. This finding implies the beginning of a new tendency since the global financial turmoil, and new challenges for the common monetary policy. Finally, we analyze the determinants of inflation differentials, empirically testing a number of theories including price level equalization, productivity differentials, differences in cyclical positions, labor and product market rigidities. We conclude that inflation differentials are not the result of equilibrating, transitory forces, but rather of persistent structural and country-specific factors. This calls for structural reforms in labor and product markets, and countercyclical fiscal policy measures at the individual country level. As inflation differentials pose a serious challenge for the monetary policy of the ECB, we further believe that the ECB should be equipped with additional policy instruments to cope with them in a more direct way.

Suggested Citation

  • PIROVANO, Mara & VAN POECK, André, 2011. "Eurozone inflation differentials and the ECB," Working Papers 2011014, University of Antwerp, Faculty of Applied Economics.
  • Handle: RePEc:ant:wpaper:2011014

    Download full text from publisher

    File URL:
    Download Restriction: no

    References listed on IDEAS

    1. Margarida Duarte, 2003. "The euro and inflation divergence in Europe," Economic Quarterly, Federal Reserve Bank of Richmond, issue Sum, pages 53-70.
    2. Consuelo Gámez Amián & Amalia Morales Zumaquero., 2002. "Complete or Partial Inflation Convergence in the EU?," Economic Working Papers at Centro de Estudios Andaluces E2002/09, Centro de Estudios Andaluces.
    3. Patrick Honohan & Philip R. Lane, 2003. "Divergent inflation rates in EMU," Economic Policy, CEPR;CES;MSH, vol. 18(37), pages 357-394, October.
    4. Kwiatkowski, Denis & Phillips, Peter C. B. & Schmidt, Peter & Shin, Yongcheol, 1992. "Testing the null hypothesis of stationarity against the alternative of a unit root : How sure are we that economic time series have a unit root?," Journal of Econometrics, Elsevier, vol. 54(1-3), pages 159-178.
    5. Siklos, Pierre L & Wohar, Mark E, 1997. "Convergence in Interest Rates and Inflation Rates across Countries and over Time," Review of International Economics, Wiley Blackwell, vol. 5(1), pages 129-141, February.
    6. John H. Rogers, 2002. "Monetary union, price level convergence, and inflation: how close is Europe to the United States?," International Finance Discussion Papers 740, Board of Governors of the Federal Reserve System (U.S.).
    7. Robert J. Barro & Xavier Sala-i-Martin, 1991. "Convergence across States and Regions," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 22(1), pages 107-182.
    8. Fabio Busetti & Lorenzo Forni & Andrew Harvey & Fabrizio Venditti, 2007. "Inflation Convergence and Divergence within the European Monetary Union," International Journal of Central Banking, International Journal of Central Banking, vol. 3(2), pages 95-121, June.
    9. Emil Stavrev, 2008. "What Explains Growth and Inflation Dispersions in EMU?," Czech Journal of Economics and Finance (Finance a uver), Charles University Prague, Faculty of Social Sciences, vol. 58(01-02), pages 57-67, January.
    10. Kocenda, Evzen & Papell, David H, 1997. "Inflation Convergence within the European Union: A Panel Data Analysis," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 2(3), pages 189-198, July.
    11. Canzoneri, Matthew, et al, 2002. "Productivity Trends in Europe: Implications for Real Exchange Rates, Real Interest Rates, and Inflation," Review of International Economics, Wiley Blackwell, vol. 10(3), pages 497-516, August.
    12. Weber, Axel A. & Beck, Günter W., 2005. "Inflation rate dispersion and convergence in monetary and economic unions: lessons for the ECB," CFS Working Paper Series 2005/31, Center for Financial Studies (CFS).
    13. Barro, Robert J & Sala-i-Martin, Xavier, 1992. "Convergence," Journal of Political Economy, University of Chicago Press, vol. 100(2), pages 223-251, April.
    Full references (including those not matched with items on IDEAS)


    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.

    Cited by:

    1. Cavallo, Antonella & Ribba, Antonio, 2014. "Euro area inflation as a predictor of national inflation rates," Journal of Policy Modeling, Elsevier, vol. 36(6), pages 1048-1065.
    2. Stijn Ferrari & Mara Pirovano, 2016. "Does one size fit all at all times? The role of country specificities and state dependencies in predicting banking crises," Working Paper Research 297, National Bank of Belgium.
    3. repec:eee:ecolet:v:156:y:2017:i:c:p:145-150 is not listed on IDEAS

    More about this item


    European Monetary Union; Inflation differentials; ECB;

    JEL classification:

    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies

    NEP fields

    This paper has been announced in the following NEP Reports:


    Access and download statistics


    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:ant:wpaper:2011014. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Joeri Nys). General contact details of provider: .

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.