Inflation and Euro Membership

The aim of this article is to investigate the relation between Euro membership and inflation. For this purpose, we construct two models that explain inflation using non-monetary variables. In order 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 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, our 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.