Euro area Inflation as a Predictor of National Inflation Rates

Preprint, Other ORP type OPEN
Antonella Cavallo ; Antonio Ribba (2013)
  • Publisher: Dipartimento di Economia Marco Biagi
  • Subject: Inflation Differentials; Euro area; Structural Cointegrated VARs; Permanent-transitory Decompositions; | Inflation differentials, euro area, structural Cointegrated VARs, permanent-transitory decompositions
    • jel: jel:E31 | jel:C32

The stability of inflation differentials is an important condition for the smooth working of a currency area, such as the European Economic and Monetary Union. In the presence of stability, changes in national inflation rates, while holding Euro-area inflation fixed contemporaneously, should be only transitory. If this is the case, the rate of inflation of the whole area can also be interpreted as a predictor, at least in the long run, of the different national inflation rates. However, in this paper we show that this condition is satisfied only for a small number of countries, including France and Italy. Better convergence results for inflation differentials are, instead, found for the USA. Some policy implications are drawn for the Eurozone.
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