151 - The Maastricht Inflation Criterion: What is the Effect of Expansion of the European Union?

DNB Working Papers
Date 16 November 2007
Following the Maastricht criteria, a country seeking to join the European Monetary Union cannot have an inflation rate in excess of 1.5 percent plus the average inflation rates in the three 'best performing' EU countries. This inflation reference value is a non-increasing function of the number of EU members. Looking backwards, the effect of increasing the number of EU countries from 15 to 27would have been sizeable in 2003 and 2004, but relatively modest since 2005. Monte Carlo simulations show that the expansion of the EU from 15 to 27 members reduces the expected inflation reference value by 0.15-0.2 percentage points, but with a considerable probability of a larger reduction. The treatment of countries with negative inflation rates in the calculation of the reference value has a
major impact on the results. JEL classifications: E31, E42, E63. Keywords: Maastricht Treaty, European Monetary Union, inflation, convergence.