TCER Working Paper Series INFLATION DIFFERENTIALS AND THE DIFFERENCES OF MONETARY POLICY EFFECTS AMONG EURO AREA COUNTRIES

The purpose of this paper is to investigate (i) at first, whether there exists persistent inflation differentials among euro area countries, namely, whether inflation rates among euro area courtiers have converged or not, (ii) next, if there exist persistent inflation differentials among euro area countries, we will investigate the causes of the inflation differentials, especially, we focus on the inflation persistence components (backward-looking price setting behavior) or cyclical components (output gap), (iii) at last, if the causes of inflation are different among countries, whether these differences lead to different effects of monetary policy has. We find that (i) overall euro area inflation rates are in a process of convergence, but cross-country dispersion in inflation rates across countries has not been eliminated, (ii) the differences in the inflation persistence and the sensitivity of inflation to cyclical components would contribute to the inflation differentials among euro area countries, (iii) there exist the differences in monetary policy effects among these countries, which are consistent with the differences of inflation persistence and sensitivity of inflation to cyclical components across countries