Euro area inflation as a predictor of national inflation rates |
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| Institution: | 1. Department of Psychology, Western Illinois University, Macomb, IL 61455, United States;2. Faculty of Psychology, University of Warsaw, Poland;3. Work and Organizational Psychology, University of Amsterdam, The Netherlands;4. Work and Organizational Psychology, University of Nijmegen, The Netherlands;5. Departments of Psychology and Genetics, Federal University of Rio Grande do Sul, Brazil;1. Institute of Immunology, Faculty of Veterinary Medicine, Freie Universität Berlin, Robert-von-Ostertag Str. 7-13, D-14163 Berlin, Germany;2. Clinic of Small Animals, Faculty of Veterinary Medicine, Freie Universität Berlin, Oertzenweg 19b, D-14163 Berlin, Germany;3. Institute for Immunology, Perelman School of Medicine, University of Pennsylvania, Philadelphia, PA 19104, USA |
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| Abstract: | The stability of inflation differentials is an important condition for the smooth working of a currency area, such as the European Economic and Monetary Union. In the presence of stability, changes in national inflation rates, while holding Euro area inflation fixed contemporaneously, should be only transitory. If this is the case, the rate of inflation of the whole area can also be interpreted as a predictor, at least in the long-run, of the different national inflation rates. However, in this paper we show that this condition is satisfied only for a small number of countries, including France and Italy. Better convergence results for inflation differentials are, instead, found for the USA. Some policy implications are drawn for the Eurozone. |
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| Keywords: | Inflation differentials Euro area Structural cointegrated VARs Permanent–transitory decompositions |
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