Inflation convergence in the euro area: just another gimmick?

Abstract

Purpose – The Maastricht inflation criterion has influenced the choice of disinflation strategies of prospective euro area member countries. Some historically high‐inflation countries chose the fiat disinflation strategy of “low inflation now, reforms later,” bringing inflation down quickly. Their inflation rates increased immediately after their euro applications were assessed positively and stayed significantly higher than inflation in France and Germany, two historically low‐inflation countries. The inflation differentials reflect both structural rigidities inherited from the past and higher inflation expectations stemming from the chosen disinflation strategy. This paper seeks to address these issues.Design/methodology/approach – The paper highlights the inflation consequences of the choice of compliance policies with the Maastricht inflation criterion. To this end, the paper estimates costs of future disinflations in six high‐inflation countries for which well‐established stylized facts are held.Find...