The convergence of inflation rates in the EU-12 area: A distribution dynamics approach

Abstract

This paper provides an assessment of Euro area inflation dynamics based on the distribution dynamics approach. It is found that raw series and trends have converged, although the convergence process has not been constant over time. Inflation cycles still lack of synchronization over short time horizons. In search for an economic explanation for cyclical inflation dynamics, the paper suggests that country-specific labor market institutions are likely to affect inflation outcomes above all in high inflation countries. Moreover, the cyclical inflation divergence arises from output fluctuations.