Inflation differentials in EMU: what can we learn from the time series evidence?

This note discusses whether the inflation process in Portugal, Ireland, Greece and Spain - countries that after the launch of the euro experienced national inflation rates above the weighted average of the EMU- has different time series properties from the EMU average and explains the possible implications of inflation differentials for the union and the national governments of member-countries. We find that the inflation differentials in Greece, Portugal and Spain are a long-run phenomenon which leads to a continuous real exchange appreciation. We interpret this as evidence for the debt problems that have arisen over the last two years in euro area.