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

Publication Date:

January 1, 2008

Electronic Access:

Free Download. Use the free Adobe Acrobat Reader to view this PDF file

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.

Series:

Working Paper No. 2008/021

Subject:

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

English

Publication Date:

January 1, 2008

ISBN/ISSN:

9781451868838/1018-5941

Stock No:

WPIEA2008021

Pages:

39

Please address any questions about this title to publications@imf.org