Inflation Linkages Within The Eurozone: Core vs. Periphery
| DOI | http://doi.org/10.1111/sjpe.12184 |
| Date | 01 May 2019 |
| Published date | 01 May 2019 |
INFLATION LINKAGES WITHIN THE
EUROZONE: CORE VS. PERIPHERY
Georgios Magkonis* and Abhijit Sharma**
ABSTRACT
We examine the process of inflation transmission among GIIPS countries
(Greece, Ireland, Italy, Portugal and Spain) and Germany. Our findings suggest
that inflation spillovers have increased since 2001. We also find that peripheral
economies are (dis-)inflation transmitters to the core. This finding is significant
for policy formulation, given the very low inflation environment that currently
exists in the Euro area and the macroeconomic implications that arise from this.
II
NTRODUCTION
Price stability is the main objective of central banking. While they face a mul-
tiplicity of policy objectives, central banks have a clear mandate to maintain
long-term price stability through the use of appropriate policy instruments.
For the case of the European Central Bank (ECB), it is officially stated that
‘the primary objective of the ESCB shall be to maintain price stability’ (Arti-
cle 2, Protocol 4, Statute of the ESCB and ECB). The main policy tool to
achieve this target is the interest rate. Since the early 1990s an increasing num-
ber of central banks have adopted explicit inflation targets as a way to anchor
expectations. Since then, inflation targeting has become an addition to the
central banker’s toolkit. Even though empirical evidence is not conclusive
(Arestis et al., 2014), inflation targeting is considered to be part of the conven-
tional wisdom relating to optimal monetary policy (Woodford, 2004).
While the ECB has not adopted any explicit target, eurozone monetary
policy has focused on a target of 2% inflation. Since its establishment in
1999, the ECB has kept inflation rates below the 2% target for much of the
period after the adoption of the Euro with some exceptions such as the per-
iod after 2007. Figure 1 shows the inflation performance of the Eurozone as
well as the corresponding one for the United States. From the creation of
Euro until late 2007, the ECB was quite successful in keeping the inflation
rate close to 2%. The only exception was the first quarter of 2008 where
inflation increased above this target. For the case of the United States, the
inflation rate reached a maximum of 5.6% in July 2008. After the onset of
*University of Portsmouth Economics and Finance
**University of Bradford School of Management
Scottish Journal of Political Economy, DOI: 10.1111/sjpe.12184, Vol. 66, No. 2, May 2019
©2018 Scottish Economic Society.
277
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