Inflation Differentials in the EU: A Common (Factors) Approach with Implications for EU8 Euro Adoption Prospects

January 1, 2008

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Inflation Differentials in the EU: A Common (Factors) Approach with Implications for EU8 Euro Adoption Prospects, (USA: International Monetary Fund, 2008) accessed November 21, 2024

Disclaimer: This Working Paper should not be reported as representing the views of the IMF.The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate

Summary

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.

Subject: Factor models, Inflation, Labor market flexibility, Legal support in revenue administration, Nominal effective exchange rate

Keywords: Common-origin inflation, Country, Inflation differential, Price level, WP

Publication Details

Pages:

39
Volume:

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DOI:

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Issue:

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Series:

Working Paper No. 2008/021
Stock No:

WPIEA2008021
ISBN:

9781451868838
ISSN:

1018-5941

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