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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 2008/021, International Monetary Fund.
    • Handle: RePEc:imf:imfwpa:2008/021
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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(4), pages 687-710, November.
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    Cited by:

    1. Ms. Edda Zoli, 2009. "Commodity Price Volatility, Cyclical Fluctuations, and Convergence: What is Ahead for Inflation in Emerging Europe?," IMF Working Papers 2009/041, International Monetary Fund.
    2. Mr. Ashoka Mody & Ms. Franziska L Ohnsorge, 2007. "Can Domestic Policies Influence Inflation?," IMF Working Papers 2007/257, International Monetary Fund.
    3. repec:prg:jnlpep:v:preprint:id:640:p:1-18 is not listed on IDEAS
    4. Nagayasu, Jun, 2010. "Regional Inflation (Price) Behaviors: Heterogeneity and Convergence," MPRA Paper 25430, University Library of Munich, Germany.
    5. Nagayasu, Jun, 2011. "Heterogeneity and convergence of regional inflation (prices)," Journal of Macroeconomics, Elsevier, vol. 33(4), pages 711-723.
    6. Mr. Emil Stavrev, 2009. "Forces Driving Inflation in the New EU10 Members," IMF Working Papers 2009/051, International Monetary Fund.

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