The Euro Zone Inflation Differentials Between The Member States Of Origin

In accordance with the provisions of the Maastricht Treaty signed in1992, the ECB’s primary and only goal is to control the Eurozone inflation rate and to keep it below2%. Until2008, before the outbreak of the debt crisis in Europe, this goal is well reached. The inflation rate of entire euro zone is basically controlled at below3%. However, inside the euro zone, there is an entirely different story.When euro coins and banknotes entered circulation on1January2002, the inflation rate in Austria is lowest, being2.0%; while the inflation rate in Ireland is highest in euro area, being5.3%; the standard deviation of inflation rate in the Euro-12countries is about3.3percentage points. On the other hand the latest data in October2011, showing that the inflation rate of Estonia is the highest, reached a level of4.7percent; while the inflation rate in Ireland is the lowest, being only1.5%; while the two largest economies, France and Germany’s inflation rate being2.5%and2.9%. The standard deviation of inflation rate in Euro-17is about3.2percentage points.Obviously, although being inside the same euro zone, inflation rates vary alot between different countries cannot be ignored. According to the classical quantity theory of money, in the long run the price is determined only by the money supply. However, under the same monetary system, under the control of the same monetary policy, there still exists significant difference between countries. What factors have led to this difference in the rate of inflation? And to which extent do these factors matter? What kinds of effect will this inflation rate differential have on euro-zone economy? This paper will try to explore this issue using panel data regression, via Balassa-Samuelson effect, the price convergence effect, imported inflation, domestic factor markets, structural differences, the impact of national fiscal policy and the economic cycle.