Regional Inflation Dynamics within and across Euro Area and a Comparison with the US

We investigate co-movements in inflation dynamics within and across euro area regions and find it important for monetary policy to monitor regional inflation dynamics to enhance the understanding of aggregate inflation. We employ a model where regional inflation dynamics are explained by common euro area and country specific factors and an idiosyncratic regional component. We find substantial common area wide component, that can be related to common euro area monetary policy, to exchange rate and oil prices changes. The effects of the area wide factors differ across regions, however. We also find a substantial national component. Our findings do not differ substantially before and after EMU. Analysing US regional inflation developments yields similar results regarding the relevance of common US factors.