Euro Area Inflation Differentials

47 Pages Posted: 10 Dec 2004

See all articles by Ignazio Angeloni

Ignazio Angeloni

Italian Finance Ministry - International Financial Relations

Michael Ehrmann

European Central Bank (ECB); Bank of Canada

Date Written: September 2004

Abstract

We build a stylised 12-country model of the euro area and use it to analyse why differences in national inflation and growth rates arise within the European monetary union. We find that inflation persistence is a key potential explanatory factor. Other more frequently mentioned reasons, like country-specific shocks or differences in the monetary transmission mechanism across countries, count less. We also look at how a monetary policy geared to area-wide average inflation affects these differentials. Our model suggests that area-wide inflation stability and low inflation differentials are complementary.

Keywords: currency union, inflation differentials, inflation persistence, euro area

JEL Classification: E31, E32, E52, F42

Suggested Citation

Angeloni, Ignazio and Ehrmann, Michael, Euro Area Inflation Differentials (September 2004). ECB Working Paper No. 388. Available at SSRN: https://ssrn.com/abstract=576026

Ignazio Angeloni (Contact Author)

Italian Finance Ministry - International Financial Relations ( email )

Via XX Settembre 97
Rome, Rome 00187
Italy

Michael Ehrmann

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany
+49 69 1344/7327 (Phone)
+49 69 1344/6000 (Fax)

Bank of Canada ( email )

234 Wellington Street
Ontario, Ottawa K1A 0G9
Canada

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