The Minimum Inflation Rate for Euroland

Hans-Werner Sinn, Michael Reutter

NBER Working Paper No. 8085
Issued in January 2001
NBER Program(s):   ME

As a result of the Balassa effect relative prices change rapidly between and within the euro countries. Thus it is impossible to find a common monetary policy that will result in price stability in all countries. Based on empirical estimates of the Balassa model, the paper calculates a minimum aggregate inflation rate which is compatible with the requirement that no country face a deflation. This minimum aggeragate inflation rate is 0.94% in the euro-11 countries and 1.13% in an extended Europe which incorporates the east European countries.

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