Public Finance Stability and Inflation in the EA-11

Abstract

The objective of this paper is to estimate the impact of public finance stability on price stability in the eleven founding countries of the Euro area – Austria, Belgium, Germany, Finland, France, Ireland, Italy, Luxembourg, the Netherlands, Portugal and Spain, which are referred to as the EA-11. An autoregression with distributed lag (ARDL) and annual Eurostat data for the period 1999-2024 are employed to identify the determinants of inflation in the eleven founding members of the Economic and Monetary Union (EMU). The results from the empirical analysis indicate that in the long run the inflation rate in the EA-11 separately and as a whole is in a positive nexus with the long-term interest rates, producer prices and economic growth. In the short term, inflation in the EA-11 as a group is positively related to producer prices and negatively related to real economic growth. Short-run effects on inflation vary by countries from positive through insignificant to negative.