Price setting and inflation persistence: did EMU matter?

Abstract:

Surprisingly not; or at least not directly. Using data on individual consumer prices and on sectoral inflation rates from six euro area countries spanning several years before and after the introduction of the euro, we look at whether EMU has altered the behaviour of price setters and/or the dynamics of inflation. We find no evidence of such change in 1999, when the euro was introduced as an electronic unit of account. At the start of 2002, when the paper currency appeared, the frequency of price adjustments (both upward and downward) increased suddenly, while the average magnitude of price changes fell; both, however, quickly settled back to the earlier patterns. Conversely, we do find evidence of a permanent decline in the persistence of inflation after the mid-1990s. While in principle this could be attributable to the preparation of EMU, this interpretation is put into question by the fact that a similar decline occurred also in the UK and in the US.

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