Inflation Differentials in the Euro Area: Did the ECB Care?

Abstract

Compared to inflation differentials among regions in the United States, EMU inflation differentials are larger and more persistent. Based on augmented monetary policy reactions functions, this paper addresses the question whether the presence of pronounced inflation differentials in combination with low average inflation rates has influenced monetary policy decisions of the ECB. The paper finds statistical evidence that the ECB took inflation differentials into account which may reflect the fear of deflation in low inflation countries like Germany.