Title: DIVERGENT OPTIMAL INFLATION RATES IN EURO AREA COUNTRIES OR "DOES ONE SIZE FIT ALL?"
Authors: CARABALLO AngelesEFTHIMIADIS TILEMAHOS
Citation: Argumenta Oeconomica vol. 32 no. 1 p. 15-40
Publisher: Wroclaw University Economics
Publication Year: 2014
JRC N°: JRC87981
ISSN: 1233-5835
URI: http://argumenta.ue.wroc.pl
http://publications.jrc.ec.europa.eu/repository/handle/JRC87981
Type: Articles in periodicals and books
Abstract: The aim of this paper is to derive the optimal inflation rate for the euro area (EA) countries from the relationship between the aggregate inflation and the Relative Price Variability (RPV). In order to achieve this goal, we have utilized monthly data for the Harmonized Index of Consumer Prices between January 1997 and June 2013 for the first twelve EA countries and for the EA aggregate. In a first stage, parametric and semiparametric estimations allow us to find that the inflation-RPV relationship shows a U-shaped functional profile for the majority of the countries. In a second stage, within this benchmark and using both kinds of estimations, we obtain the optimal inflation rate defined as the one that minimises the RPV. Moreover, we test the sensitivity of our results to the time period and, for semiparametric estimation, to the bandwidth selected. For EA individual countries and for the EA aggregate, it is formally shown that although the European Central Bank's "below but close to 2%" inflation target is (almost) optimal for the EA average, it is not close to the optimum inflation rate for most of the individual EA countries.
JRC Directorate:Energy, Transport and Climate

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