The Maastricht Inflation Criterion: What is the Effect of European Union Enlargement?

22 Pages Posted: 10 May 2010

See all articles by John Lewis

John Lewis

De Nederlandsche Bank - Econometric Research and Special Studies

Karsten Staehr

Tallinn University of Technology (TUT) - Department of Finance and Economics; Bank of Estonia

Abstract

According to the Maastricht Treaty, a country seeking to join the European Monetary Union cannot have an inflation rate in excess of 1.5 per cent plus the average inflation rates in the three ‘best performing’ EU countries. This inflation reference value is a non-increasing function of the number of EU members. A counterfactual analysis of historical data shows that the effect of enlarging the EU from 15 to 27 countries was sizeable in 2002–04 and again from 2007. Monte Carlo simulations suggest that the enlargement of the EU from 15 to 27 members reduces the inflation reference value by 0.15–0.2 percentage points on average, but there is a considerable probability of a larger reduction at any given moment of time. The treatment of countries with negative inflation rates in the calculation of the reference value has a major impact on the results.

Suggested Citation

Lewis, John and Staehr, Karsten, The Maastricht Inflation Criterion: What is the Effect of European Union Enlargement?. JCMS: Journal of Common Market Studies, Vol. 48, Issue 3, pp. 687-708, June 2010, Available at SSRN: https://ssrn.com/abstract=1600978 or http://dx.doi.org/10.1111/j.1468-5965.2010.02069.x

John Lewis (Contact Author)

De Nederlandsche Bank - Econometric Research and Special Studies ( email )

Amsterdam
Netherlands

Karsten Staehr

Tallinn University of Technology (TUT) - Department of Finance and Economics ( email )

Akadeemia tee 3-486
Tallinn, 12618
Estonia

HOME PAGE: http://www.ttu.ee/karsten-staehr

Bank of Estonia ( email )

Estonia Building 13
Tallinn, 15095
Estonia

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