Regional Inflation Dynamics within and across Euro Area Countries and a Comparison with the United States

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. — Guenter W. Beck, Kirstin Hubrich and Massimiliano Marcellino

[1]  J. Rogers.  Monetary union, price level convergence, and inflation: How close is Europe to the USA? , 2007 .

[2]  Danny Quah,et al.  Regional convergence clusters across Europe , 1996 .

[3]  J. Driffill,et al.  Bargaining structure, corporatism and macroeconomic performance , 1988 .

[4]  J. Stock,et al.  Forecasting Using Principal Components From a Large Number of Predictors , 2002 .

[5]  D. Cobham.  Adjustment and growth in the European Monetary Union , 1995 .

[6]  A. Rose,et al.  An Estimate of the Effect of Common Currencies on Trade and Income , 2001 .

[7]  J. Haan.  Inflation differentials in the euro area , 2010 .

[8]  C. Whiteman,et al.  International Business Cycles: World, Region, and Country-Specific Factors , 2003 .

[9]  Lucrezia Reichlin,et al.  Federal policies and local economies: Europe and the US , 2001 .

[10]  M. Woodford,et al.  INTEREST AND PRICES: FOUNDATIONS OF A THEORY OF MONETARY POLICY , 2005, Macroeconomic Dynamics.

[11]  George Kapetanios,et al.  A Comparison of Estimation Methods for Dynamic Factor Models of Large Dimensions , 2003 .

[12]  Melanie E. Ward-Warmedinger,et al.  Cross-Border Labour Mobility within an Enlarged EU , 2006, SSRN Electronic Journal.

[13]  R. Layard,et al.  Unemployment: Macroeconomic Performance and the Labour Market , 1991 .

[14]  M. Hallin,et al.  The Generalized Dynamic-Factor Model: Identification and Estimation , 2000, Review of Economics and Statistics.

[15]  Henry G. Overman,et al.  Unemployment clusters across Europe's regions and countries , 2002 .

[16]  Todd E. Clark.  Employment Fluctuations in U.S. Regions and Industries: The Roles of National, Region‐Specific, and Industry‐Specific Shocks , 1998, Journal of Labor Economics.

[17]  Marco Lippi,et al.  The Generalized Factor Model: Identification and Estimation , 2000 .

[18]  J. Bai,et al.  A Panic Attack on Unit Roots and Cointegration , 2001 .

[19]  J. Bai,et al.  Determining the Number of Factors in Approximate Factor Models , 2000 .

[20]  Jacques H. Dreze,et al.  Europe's unemployment problem , 1994, European Review.

[21]  Margarida Duarte,et al.  Fiscal Policy and Regional Inflation in a Currency Union , 2003 .

[22]  A. Banerjee,et al.  Testing for PPP: Should we use panel methods? , 2001 .

[23]  S. Wijnbergen.  Mexico and the Brady plan , 1991 .

[24]  Pierpaolo Benigno.  Optimal Monetary Policy in a Currency Area , 2001 .

[25]  Marco Lippi,et al.  OPENING THE BLACK BOX: STRUCTURAL FACTOR MODELS WITH LARGE CROSS SECTIONS , 2009, Econometric Theory.

[26]  M. Marcellino,et al.  Regional Inflation Dynamics within and Across Euro Area Countries and a Comparison with the Us , 2006, SSRN Electronic Journal.

[27]  A. Venables,et al.  Integration, Specialization, and the Adjustment , 1993 .

[28]  Paul A. Samuelson,et al.  Theoretical Notes on Trade Problems , 1964 .

[29]  Hervé Le Bihan,et al.  Price Changes in the Euro Area and the United States: Some Facts from Individual Consumer Price Data , 2006 .

[30]  P. Lane,et al.  Divergent Inflation Rates in EMU , 2003 .

[31]  Bela Balassa,et al.  The Purchasing-Power Parity Doctrine: A Reappraisal , 1964, Journal of Political Economy.

[32]  C. Engel,et al.  European Product Market Integration after the Euro , 2004 .

[33]  J. Bai,et al.  Inferential Theory for Factor Models of Large Dimensions , 2003 .

[34]  A. Weber,et al.  Price stability, inflation convergence and diversity in EMU: Does one size fit all? , 2005 .

[35]  Enrique Alberola,et al.  On the Relevance and Nature of Regional Inflation Differentials: The Case of Spain , 2000 .

[36]  F. Smets,et al.  Inflation Persistence and Price-Setting Behaviour in the Euro Area - a Summary of the Ipn Evidence , 2006, SSRN Electronic Journal.

[37]  J. Stock,et al.  Macroeconomic Forecasting Using Diffusion Indexes , 2002 .

[38]  Michael Woodford,et al.  Interest and Prices , 2011 .

[39]  Filippo Altissimo,et al.  Long-Run Determinants of Inflation Differentials in a Monetary Union , 2005 .

[40]  P. Krugman.  Adjustment and growth in the European Monetary Union: Lessons of Massachusetts for EMU , 1993 .

[41]  J. Jimeno,et al.  Regional unemployment persistence (Spain, 1976-1994) , 1998 .

[42]  Antonio Fatás,et al.  Regional labor market dynamics in Europe , 1995 .

[43]  Marc Hallin,et al.  The Generalized Dynamic Factor Model. One-Sided Estimation and Forecasting , 2003 .

[44]  Massimiliano Marcellino,et al.  Principal components at work: the empirical analysis of monetary policy with large data sets , 2005 .