147 - Regional real exchange rates and Phillips curves in monetary unions - Evidence from the US and EMU

DNB Working Papers
Publicatiedatum 21 september 2007

We study price level convergence within the US and EMU, using panel estimates of regional Phillips curves of the hybrid New-Keynesian type. The estimated half lives of deviations from trend PPP are around three years for US regions and two years for euro area countries. The start of EMU had no noticeable influence on PPP convergence in the euro area. Where nominal exchange rates accounted for the bulk of the adjustment process before 1999, this role was taken over by relative prices thereafter. Notwithstanding clear evidence of forward-lookingness, inflation persistence is substantial in both monetary unions, especially in the US . Key words : Inflation, monetary union, purchasing power parity JEL Classification: E31, E52, F41