Regional inflation dynamics within and across euro area countries and a comparison with the United States

Abstract

"Inflation differentials across regions of an integrated economy can reflect a proper response to demand and supply conditions, but can also indicate distortions with negative welfare implications. Using a novel dataset of regional inflation rates from six euro area countries, we examine the size and persistence of their differentials and find that they appear to be related to factor market distortions and other structural characteristics, rather than to cyclical and growth dynamics. Our empirical analysis shows that only about half of inflation rates variation is accounted for by area-wide factors such as monetary policy or oil price developments. National factors (such as labour market institutions) still play a very important role, and a regional component accounts for about 18% of inflation variability." Copyright (c) CEPR, CES, MSH, 2009.

Current account balances and structural adjustment in the euro area

“…As a result, the implementation of the common monetary policy and the country-specific real interest rate shocks resulting from it contributed to asymmetric economic developments (EC 2008 (Belke et al 2006a;de Grauwe 2009a). This affected the differential between the country-specific inflation dynamics (Beck et al 2009). …”

Combining country-specific forecasts when forecasting Euro area macroeconomic aggregates

“…This probably reflects the large heterogeneity of inflation rates in the Euro area member countries. Beck et al (2009) point out that both before and after the introduction of the Euro in 1999, large and persistent differences in inflation rates of EMU member countries are observed. Country-specific factors caused by fiscal policy and special economic factors like production structures or labour market institutions can lead to divergence of inflation rates.…”

Sources of Regional Inflation in Poland

“…First, local labour market conditions and business sector peculiarities can uniquely influence regional inflationary pressure. 2 Second, regions can respond asymmetrically to global and national shocks. Economic structures, geographical location and trade patterns can make regional inflation more or less responsive to global commodity price developments, the economic environment in neighbouring countries or in the country of origin.…”

“…Our empirical strategy generally follows Forni and Reichlin (2001), Stock and Watson (2002) and Beck et al (2009). In a two-step procedure, we estimate orthogonal principal components corresponding to the three sets of shocks.…”