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

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
Table Of Contents
Contents; I. Introduction; II. GDFM Methodology and Data Issues; A. Intuition and Existing Literature; B. GDFM Statistical Framework for Common-Origin Inflation; C. The Data Set; III. Results; A. Covariance Properties and Number of Common Factors; B. Common-Origin Inflation in the 25 EU Countries; C. Explaining Intra-EU Common-Origin Inflation Differentials; D. Idiosyncratic Inflation and the Maastricht Criterion; IV. Conclusions and Implications; References; Appendix I. Implementing the GDFM; Appendix II. Data Definitions and Series
Literary Form
non fiction
Description based upon print version of record
Physical Description
1 online resource (41 p.)
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Form Of Item

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