Until the Global Financial Crisis of 2007–2008, inflation differentials in the euro area could be explained by a general trend towards price level convergence; that is, countries with lower price levels tended to have higher inflation rates than countries with higher price levels. Since then, however, the trend has reversed: price levels in the euro area are now diverging. Time series analyses suggest that this divergence is not temporary but, rather, has been anchored in the time series process of price levels all along. This is true not only for the aggregate of the harmonized index of consumer prices but also for sub-aggregates of tradable goods. A potential explanation for these findings could be attributed to monopolistic price discrimination. Empirical studies have documented the significant role played by price discrimination based on per capita income in international trade. Accordingly, the price levels of the EMU member states in deed display a clear positive correlation with GDP per capita. Furthermore, real GDP per capita between the member states of the EMU is also diverging and – as to expected in case of a positive correlation between real GDP per capita and price levels – the divergence of nominal GDP per capita is lager than the divergence of real GDP per capita.
The following article describes these empirical findings, outlines possible explanations for them, and discusses various options for responsive economic policy action:
The Divergence of Price Levels in the European Union (Intereconomics Review of European Economic Policy, Volume 58, 2023)
VOLXWIRTSCHAFT 