Does one monetary policy fit all? the determinants of inflation in EMU countries

Boschi, Melisso and Girardi, Alessandro (2005): Does one monetary policy fit all? the determinants of inflation in EMU countries. Published in: Current Politics and Economics of Europe , Vol. 1/2, No. 19 (January 2008): pp. 31-62.

Abstract

This chapter aims at assessing the long-run determinants and the short-run dynamics of inflation in each country belonging to the European Monetary Union (EMU). Our work complements the recent literature on this topic for the Euro Area as a whole. Detecting such determinants can be crucial in designing structural reforms acting as aside instruments of monetary policy in maintaining price stability. The empirical methodology consists of a reinterpretation of the structural cointegrating VAR approach, which allows for a structural long-run analysis of inflation determinants along with an accurate assessment of its short-run dynamics. The main conclusion emerging from the estimates is that not only the determinants of inflation differ in the countries belonging to the Euro Area, but also that cost-push factors have a considerable role in explaining inflation in most of the countries examined. As a policy implication, a tight monetary policy pursued in those countries whose inflation is mainly driven by costs would result in a contraction of economic activity without exerting relevant effects on price dynamics.

• Item Type: MPRA Paper
• Language: English
• Keywords: Inflation, markup, EMU countries, long-run structural VARs, subset VEC models
• Subjects: C - Mathematical and Quantitative Methods > C3 - Multiple or Simultaneous Equation Models ; Multiple Variables > C32 - Time-Series Models ; Dynamic Quantile Regressions ; Dynamic Treatment Effect Models ; Diffusion Processes ; State Space Models; E - Macroeconomics and Monetary Economics > E3 - Prices, Business Fluctuations, and Cycles > E31 - Price Level ; Inflation ; Deflation; E - Macroeconomics and Monetary Economics > E0 - General > E00 - General; E - Macroeconomics and Monetary Economics > E3 - Prices, Business Fluctuations, and Cycles > E37 - Forecasting and Simulation: Models and Applications

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