Inflation Differentials in the Euro Area and Their Determinants - An Empirical View

Abstract:     
In this paper, we present evidence on the statistical features of observed dispersion in inflation rates in the Euro area. Our descriptive exercise shows that there is still a remarkable dispersion of HICP inflation rates and most of dispersion originates in the non-traded categories of the HICP. We examine the determinants of inflation differentials in a panel of the states of the Euro area in 1999-2007. The evidence shows that output gaps and a proxy for price level convergence were statistically significant; some determinants that were found significant in previous studies did not have impact on inflation (e.g. exchange rate).

Keywords: inflation differentials, price convergence, exchange rate, panel data

JEL Classifications: C23, E31, F15, F41

Working Paper Series