Inflation and Euro Membership

This article aims to investigate the relation between Euro membership and inflation. We construct two models that explain inflation using nonmonetary variables. To estimate these models, we collect yearly panel data for the 28 members of the European Union from 1998 to 2016. Due to the problem of endogeneity associated with some variables, we use the panel GMM following Arellano and Bond (1991) to perform all estimations. Results for the estimations of coefficients do not indicate a relation between membership in the Eurozone and inflation rates, neither for the short nor long term. Thus, the results can be considered contra-evidence for statements that the Euro increases short term inflation of its new members or that it reduces long term inflation rates permanently.