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Euro area inflation: aggregation bias and convergence

[journal article]

Byrne, Joseph P.; Fiess, Norbert

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Abstract Monetary policy of the European Monetary Union targets aggregate euro area inflation. Concerns are growing that a focus on aggregate inflation may cause national inflation rates to diverge. While different explanations for diverging aggregate euro area inflation have been brought forward, the very impact of aggregation on divergence has, however, not been studied. We find a striking difference in convergence depending on the level of aggregation. While aggregate national inflation rates are diverging, disaggregate inflation rates are converging. We find that aggregation appears to bias evidence towards non-convergence. Our results are consistent with prominent theoretical and empirical evidence on aggregation bias.
Keywords Euro; aggregation; estimation; EU
Classification Political Economy; Economic Policy; Economic Statistics, Econometrics, Business Informatics
Free Keywords Euro area inflation; Aggregation bias; Convergence; C12; C22; E31;; Inflationsrate; Zeitreihenanalyse
Document language English
Publication Year 2010
Page/Pages p. 339-357
Journal Review of World Economics, 146 (2010) 2
Status Postprint; peer reviewed
Licence PEER Licence Agreement (applicable only to documents from PEER project)