Divergent inflation rates in EMU

Inflation divergence Inflation rates have diverged much more widely than expected among the member states of the EMU. We show that much of this is attributable to the differential impact on different member states of the weakness of the euro on international currency markets in the early months of the union. The Balassa–Samuelson productivity growth effect has not yet played an important role – even in respect of the outlier Ireland – although it will likely be more significant over a longer run, especially as the accession countries join. — Patrick Honohan and Philip Lane