The Impact of the European Monetary Union on Inflation Persistence in the Euro Area

Abstract

This paper uses the European Monetary Union (EMU) as a natural experiment to investigate whether more effective monetary policy reduces the persistence of ination. Taking into account the fractional integration of ination, we con_rm that ination dynamics differed considerably across Euro area countries before the start of EMU. Since 1999, however, results obtained from panel estimation indicate that the degree of long run ination persistence has converged. In line with theoretical predictions, we find that the persistence of ination has significantly decreased in the Euro area probably as a result of the more effective monetary policy of the ECB.