A BEJM Topics article.

Abstract

We build a stylised 12-country model of the euro area and use it to analyse how differences in national inflation and growth rates arise within the European Economic and Monetary Union (EMU). We find that the main source of differentials in the early years of the EMU have been aggregate demand shocks, followed by cost-push shocks; euro exchange rate shocks come third. Among the propagation mechanisms a key role is played by inflation persistence; for plausible parameter values even small changes in persistence can produce a dramatic increase in the differentials. Finally, we also find that a tight control of average area-wide inflation around a target tends to reduce the differentials as well.

Submitted: September 29, 2006 · Accepted: December 4, 2006 · Published: August 7, 2007

Recommended Citation

Angeloni, Ignazio and Ehrmann, Michael (2007) "Euro Area Inflation Differentials," The B.E. Journal of Macroeconomics: Vol. 7 : Iss. 1 (Topics), Article 24.
Available at: http://www.bepress.com/bejm/vol7/iss1/art24