Euro Area Inflation Differentials

By Ignazio Angeloni, Michael Ehrmann. Social Science Research Network, 2007

241 citations recorded by the source corpus.

We build a stylised 12-country model of the euro area and use it to analyse how differences in national inflation and growth rates arise within the European Economic and Monetary Union (EMU). We find that the main source of differentials in the early years of the EMU have been aggregate demand shocks, followed by cost-push shocks; euro exchange rate shocks come third. Among the propagation mechanisms a key role is played by inflation persistence; for plausible parameter values even small changes in persistence can produce a dramatic increase in the differentials. Finally, we also find that a tight control of average area-wide inflation around a target tends to reduce the differentials as well.

Subfields: Economics and Econometrics, Finance

View Paper: https://www.semanticscholar.org/paper/6858c85f7f27da6d2fff0005948cbb874908218b

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Citations in the corpus

Real Exchange Rate Misalignments in the Euro Area (2020, unknown): “…with Friedman (1953) and extending to other leading scholars’ contributions (e.g. Mundell 1961; Flood and Rose 1999), as well as to the literature on inflation differentials and the persistence of inflation within the euro area (e.g., Altissimo et al. 2006; Angeloni and Ehrmann 2007; De Haan 2010).”
Inflation Convergence and Divergence within the European Monetary Union (2012, background): “Angeloni and Ehrmann (2004) estimate a stylized multicountry structural model for the euro area to analyze the response of inflation differentials to a number of different shocks.”