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

Authors: Beck, Guenter W.¹; Hubrich, Kirstin²; Marcellino, Massimiliano³

Source: Economic Policy, Volume 24, Number 57, January 2009 , pp. 141-184(44)

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Abstract:

SUMMARY Regional inflation

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

Document Type: Research article

DOI: http://dx.doi.org/10.1111/j.1468-0327.2009.00214.x

Affiliations: 1: Goethe University Frankfurt and CFS 2: Research Department, European Central Bank 3: European University Institute, Bocconi University and CEPR

Publication date: 2009-01-01