A study of inflation differentials among Euro-countries

University essay from Umeå universitet/Nationalekonomi

Author: Annaliza Grönlund; [2017]

Keywords: ;

Abstract: Adapting the euro-currency implies transmitting the national monetary policy to European Central Bank. This implies that a nation can no longer use the monetary policy to dampen or to stimulate the economy. A high rate of inflation is destructive to an economy while a low rate of inflation can be beneficial to a limited extent. EMU has a task to ensure the stable rate of inflation at two percent; hence the inflation levels of its member states have to converge. If the inflation of the EMU member state is at target level then the credibility of ECB will be achieved. And the inflation expectations will be low. But since the adaption of euro as the single currency, inflation levels have diverged from each other. And this is worsened by the financial crisis in 2008.  Aside from that, what other factors affect the differences in inflation level and what might be the economic consequences waiting for the future of Euro-countries? The data used in this study ranges from year 1993 to 2015. There are about 19 countries that adapted euro as their single currency but due to the lack of data, only 13 Euro-countries are involved in this study. These countries are Austria, Belgium, Estonia, Finland, France, Germany, Greece, Ireland, Italy, Luxembourg, the Netherlands, Portugal and Spain. By using the method Ordinary least squares, I identify that debt problems of Portugal, Ireland, Italy, Greece and Spain were one of the responsible to this inflation differential problem. The effect of this on countries with high level of inflation might be a strict fiscal policy, meaning budget cuts and increased tax rate.  

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