We use panel estimates of regional Phillips curves of the hybrid New Keynesian type to study price level convergence within the US and EMU. Regional inflation rates tend to eliminate PPP deviations in both monetary unions, with average half-lives around 3 1/2 years. The start of EMU did not greatly affect PPP reversion in the euro area. Where changes in nominal exchange rates accounted for the bulk of the adjustment process before 1999, this role was largely taken over by regional inflation differences since. Notwithstanding clear evidence of forward-lookingness in the US, inflation persistence is substantial in both monetary unions.

Inflation, Monetary union, Purchasing power parity
Price Level; Inflation; Deflation (jel E31), Monetary Policy (Targets, Instruments, and Effects) (jel E52), Open Economy Macroeconomics (jel F41)
dx.doi.org/10.1016/j.jimonfin.2011.05.002, hdl.handle.net/1765/26088
ERIM Top-Core Articles
Journal of International Money and Finance: theoretical and empirical research in international economics and finance
Erasmus Research Institute of Management

Price level convergence and regional Phillips curves in the US and EMU. (2011). Price level convergence and regional Phillips curves in the US and EMU. Journal of International Money and Finance: theoretical and empirical research in international economics and finance, 30(5), 749–763. doi:10.1016/j.jimonfin.2011.05.002