External causes of euro zone inflation differentials : A re-examniation of the evidence

This article focuses on external causes of Euro Zone inflation differential. Persistent inflation differences may influence inflationary expectations and can amplify regional business cycles. With a uniform nominal interest rate, the domestic real interest rates will be lower in high inflation regions, discouraging savings and stimulating consumption and investment. Studies show that in the euro zone exchange rate developments do not appear to be a major driver of inflation differentials and when the accession countries enter European Monetary Union the cross-country variability in exchange rate developments will increase only slightly, suggesting that in the future exchange rate developments are unlikely to be a major factor behind euro zone inflation differentials