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Board of Governors of the Federal Reserve System

International Finance Discussion Papers

Number 746

July 2002

REGIONAL INFLATION IN A CURRENCY UNION:
FISCAL POLICY VS. FUNDAMENTALS

Margarida Duarte and Alexander L. Wolman

International Finance Discussion Papers Numbers 744-751
were presented on July 5-6, 2002 at the first conference
organized by the International Research Forum on
Monetary Policy established by the European Central Bank,
the Federal Reserve Board, the Center for German and
European Studies at Georgetown University, and the Center
for Financial Studies at Goethe University.

NOTE: International Finance Discussion Papers are preliminary materials circulated to stimulate discussion
and critical comment. References to International Finance Discussion Papers (other than an
acknowledgment that the writer has had access to unpublished material) should be cleared with the author
or authors. Recent IFDPs are available on the Web at www.federalreserve.gov/pubs/ifdp. The views in this
paper are solely the responsibility of the author and should not be interpreted as reflecting the views of the
Board of Governors of the Federal Reserve System or any other person associated with the Federal Reserve
System.
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5;
Figure 4. Inflation Rates.
Percent
10

8

6

4

2

0

-2

-4
1995:1 1997:1 Quarter 1999:1 2001:1

Germany France Portugal Ireland EMU 12
Note: All series are annualized percent changes from the previous period. Source: DRI International Economic Database
Figure 6. Country Size and Inflation Differentials.

1.5

1

0.5

0
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21

-0.5

-1

x = 0.5 x = 0.45 x = 0.4 x = 0.35 x = 0.3 x = 0.25
Figure 7. Fiscal Policy and Inflation Differentials.

1.4

1.2

1

0.8

0.6

0.4

0.2

0
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21

-0.2

-0.4

coef = 0 coef = -0.1 coef = -0.5 coef = -0.8 coef = -1 coef = -2 coef = -10 coef = -50