Revisiting inflation in the euro area allowing for long memory

Abstract

We analyse inflation and inflation differentials in the euro area allowing for long memory and a new type of limiting theory denoted fixed-bandwidth. Our results differ from those based on standard normal asymptotics and the short memory assumption, and we also find that the inflation differentials between 'core' and 'peripheral' countries are strongly persistent. 'Core' economies appear to have less persistent differentials and may be more integrated, while 'peripheral' countries with high inflation may find themselves under competitive pressure for a long time.