Using a New-Keynesian framework, we investigate how far the inflationary processes in member states of EMU cause regional price levels to converge. We fail to produce hard evidence of the present existence of such an adjustment mechanism, notwithstanding that inflation in some countries tends to converge towards the euro area level. Overa11, inflation persistence has declined significantly over the years, but there are still marked differences between countries on this score. We conclude that the euro area is not an optimal currency area yet, lending support to the quest for further structura1 reforms in European labour and product markets.

EMU, inflation, monetary policy
Price Level; Inflation; Deflation (jel E31), Central Banks and Their Policies (jel E58), International Factor Movements and International Business (jel F2)
hdl.handle.net/1765/6800
Tinbergen Institute Discussion Paper Series
Research Centre for Economic Policy (OCFEB)

Berk, J.M, & Swank, J. (2002). Regional Price Adjustment in a Monetary Union: the case of EMU (No. TI 02-077/2). Tinbergen Institute Discussion Paper Series. Retrieved from http://hdl.handle.net/1765/6800