Divergent Inflation Rates in EMU

We analyse the sources of divergent national inflation rates among EMU member countries. At one level, we review the Irish 'outlier' experience; at another, we estimate panel regressions for the 1999-2001 period. We highlight the role played by differential exposure to euro exchange rate movements in explaining inflation divergence. In addition, we find evidence that ouput gaps and a "price level convergence" effect have also been important. We draw some policy conclusions for the accession countries that are hoping to join EMU.