The stability of inflation differentials is an important condition for the
smooth working of a currency area, such as the European Economic and Monetary
Union. In the presence of stability, changes in national inflation rates, while
holding Euro-area inflation fixed contemporaneously, should be only transitory.
If this is the case, the rate of inflation of the whole area can also be interpreted
as a predictor, at least in the long run, of the different national inflation rates.
However, in this paper we show that this condition is satisfied only for a small
number of countries, including France and Italy. Better convergence results for
inflation differentials are, instead, found for the USA. Some policy implications
are drawn for the Eurozone.The stability of inflation differentials is an important condition for the smooth working of a currency area, such as the European Economic and Monetary Union. In the presence of stability, changes in national inflation rates, while holding Euro-area inflation fixed contemporaneously, should be only transitory. If this is the case, the rate of inflation of the whole area can also be interpreted as a predictor, at least in the long run, of the different national inflation rates. However, in this paper we show that this condition is satisfied only for a small number of countries, including France and Italy. Better convergence results for inflation differentials are, instead, found for the USA. Some policy implications are drawn for the Eurozone
