Cover IMF Working Papers
Inflation Differentials in the EU: A Common (Factors) Approach with Implications for EU8 Euro Adoption Prospects
Author: International Monetary Fund
Series:
IMF Working Papers
Volume/Issue:
Volume 2008: Issue 021
Language:
English
Publication Date:
01 Jan 2008
DOI:
https://doi.org/10.5089/9781451868838.001
ISBN:
9781451868838
ISSN:
1018-5941
Pages:
39
Keywords:
WP; country; price level; common-origin inflation; inflation differential
Legal-disclaimer:
IMF Working Papers describe research in progress by the author(s) and are published to elicit comments and to encourage debate. The views expressed in IMF Working Papers are those of the author(s) and do not necessarily represent the views of the IMF, its Executive Board, or IMF management.
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This paper explores inflation determinants within the EU and implications for new members' euro adoption plans. Factor analysis partitions observed inflation in EU25 countries into common-origin and country-specific (idiosyncratic) components. Cross-country differences in common-origin inflation within the EU are found to depend on gaps in the initial price level, changes in the nominal effective exchange rate, the quality of institutions, and the economy's flexibility. Idiosyncratic inflation is generally small in magnitude. Nonetheless, the results show that country-specific shocks have systematically pushed down headline inflation, potentially influencing the assessment of compliance with the Maastricht inflation criterion.
Cover IMF Working Papers
IMF Working Papers
ISSN:
1018-5941
Publisher:
International Monetary Fund