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Inflation Differentials in the EU; A Common (Factors) Approach with Implications for EU8 Euro Adoption Prospects

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  • International Monetary Fund

Abstract

This paper explores inflation determinants within the EU and implications for new members' euro adoption plans. Factor analysis partitions observed inflation in EU25 countries into common-origin and country-specific (idiosyncratic) components. Cross-country differences in common-origin inflation within the EU are found to depend on gaps in the initial price level, changes in the nominal effective exchange rate, the quality of institutions, and the economy's flexibility. Idiosyncratic inflation is generally small in magnitude. Nonetheless, the results show that country-specific shocks have systematically pushed down headline inflation, potentially influencing the assessment of compliance with the Maastricht inflation criterion.

Suggested Citation

  • International Monetary Fund, 2008. "Inflation Differentials in the EU; A Common (Factors) Approach with Implications for EU8 Euro Adoption Prospects," IMF Working Papers 08/21, International Monetary Fund.
  • Handle: RePEc:imf:imfwpa:08/21
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    File URL: http://www.imf.org/external/pubs/cat/longres.aspx?sk=21625
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    References listed on IDEAS

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    1. Willem H. Buiter, 2006. "The 'Sense and Nonsense of Maastricht' Revisited: What Have we Learnt about Stabilization in EMU?," Journal of Common Market Studies, Wiley Blackwell, vol. 44, pages 687-710, November.
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    Cited by:

    1. Nagayasu, Jun, 2010. "Regional Inflation (Price) Behaviors: Heterogeneity and Convergence," MPRA Paper 25430, University Library of Munich, Germany.
    2. Nagayasu, Jun, 2011. "Heterogeneity and convergence of regional inflation (prices)," Journal of Macroeconomics, Elsevier, vol. 33(4), pages 711-723.
    3. Emil Stavrev, 2009. "Forces Driving Inflation in the New EU10 Members," IMF Working Papers 09/51, International Monetary Fund.
    4. Ashoka Mody & Franziska L Ohnsorge, 2007. "Can Domestic Policies Influence Inflation?," IMF Working Papers 07/257, International Monetary Fund.

    More about this item

    Keywords

    Euro Area; Globalization; Inflation; Trade; generalized dynamic factors model; euro adoption; central bank; price level; monetary policy; relative price;

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