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

41 Pages Posted: 4 Feb 2008

See all articles by Franziska Ohnsorge

Franziska Ohnsorge

International Monetary Fund (IMF)

Nada Choueiri

International Monetary Fund (IMF) - Research Department

Rachel van Elkan

International Monetary Fund (IMF)

Date Written: Janurary 2008

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.

Keywords: Inflation, Euro Area, Globalization, Trade

Suggested Citation

Ohnsorge, Franziska and Choueiri, Nada and Elkan, Rachel van, Inflation Differentials in the EU: A Common (Factors) Approach with Implications for EU8 Euro Adoption Prospects (Janurary 2008). IMF Working Paper No. 08/21, Available at SSRN: https://ssrn.com/abstract=1089687

Franziska Ohnsorge (Contact Author)

International Monetary Fund (IMF) ( email )

700 19th Street NW
Washington, DC 20431
United States

Nada Choueiri

International Monetary Fund (IMF) - Research Department ( email )

700 19th Street NW
Washington, DC 20431
United States

Rachel van Elkan

International Monetary Fund (IMF) ( email )

700 19th Street, N.W.
Washington, DC 20431
United States

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