Abstract
Inflation Gaps and Sustainability of the Euro Zone : What Do the Monetary Conditions Indexes Tell Us ? The existence of inflation gaps across the euro zone countries is a real preoccupation for policy makers. Diverging levels of inflation across a monetary union lead to various gaps of real interest rates among the member countries. These gaps of real interest rates can contribute to maintain both inflation and output gaps. Therefore, the impact of real interest rates can be compensated by the movements of the real effective exchange rate. The motivation of this paper is to test the effect of real effective exchange rate movements on output gaps within the euro area countries. Using the standard version of the monetary conditions index (MCI), which is a combination of the changes of interest rate and exchange rate from some arbitrary base period, we find that there is a compensation between internal and external monetary conditions (interest rate and exchange rate) for many economies of the euro zone members. Classification JEL : E31, E42, E52, F31.
Published Version
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