Money, Prices and the Transition Emu
LIFE Working Paper 95-28
Posted: 3 May 1998
Date Written: 1995
In this paper we examine the impact of domestic and ERM-wide monetary conditions on national inflation rates in Belgium, France, Germany, Italy and the Netherlands for the period 1973-1994 and two sub periods using an extended open-economy version of the standard P*-model. The results show that the domestic price gaps have gradually been crowded out by the European price gap since the establishment of the ERM for the four non-anchor countries, indicating a loss of monetary autonomy. For Germany, both the domestic and the European price gap are significant after 1986. Although Germany still has a certain degree of monetary independence, the results show that monetary conditions in Germany's immediate neighbors increasingly matter for inflation in Germany. This points to the need for greater attention for the development of aggregate European monetary conditions by all countries, including Germany, and closer coordination of monetary policy.
JEL Classification: E52, E31
Suggested Citation: Suggested Citation