Inflation and Euro Memberships: Is there a Relation?

The aim of this article is to investigate the relation between Euro membership and inflation. In order to do so, we construct two models that explain inflation using nonmonetary variables. For our estimations, we collect yearly panel data for the 28 members of the European Union during the first 19 years of the Euro (from 1998 to 2016). Because of the problem of endogeneity associated to some of our variables, we use the panel GMM according to Arellano and Bond (1991) to perform all estimations. Results for the estimations of our coefficients do not indicate a relation between membership in the Eurozone and inflation rates, neither for the short nor for the long-term. Thus, this article can be considered contra-evidence for statements that the Euro enhances short-term inflation of its new members or that it reduces permanent inflation rates.