THE MAASTRICHT INFLATION CRITERION: WHAT IS THE EFFECT OF EXPANSION OF THE EUROPEAN UNION? John Lewis, Karsten Staehr*   Working Papers of Eesti Pank No 11/2007

Following the Maastricht criteria, a country seeking to join the European Monetary Union cannot have inflation in excess of 1.5 percent plus the average inflation in the three "best performing" EU countries. This inflation reference value is a non-increasing function of the number of EU members. Looking backwards, the effect of increasing the number of EU countries from 15 to 27 would have been sizeable in 2003 and 2004, but relatively modest since 2005. Monte Carlo simulations show that the expansion of the EU from 15 to 27 members reduces the expected inflation reference value by 0.15-0.2 percentage points, but with a considerable probability of a larger reduction. The treatment of countries with negative inflation in the calculation of the reference value has a major impact on the results.
JEL Code: : E31, E42, E63
Key words: Maastricht Treaty, European Monetary Union, inflation, convergence

* John Lewis works for De Nederlandsche Bank (Netherlands Central Bank) and Tallinn University of Technology. Karsten Staehr works for Eesti Pank and Tallinn University of Technology. Corresponding author: Karsten Staehr, Eesti Pank, Research Department, Estonia Blvd. 13, 15095 Tallinn, Estonia. Phone: +372 668 0716.
We would like to thank Marloes Foudraine, David Mayes, Martti Randveer and seminar participants at Eesti Pank for useful comments and suggestions. Any errors remain the responsibility of the authors and the views expressed are those of the authors and not necessarily those of the institutions to which they are affiliated.

Authors' e-mail addresses: j.m.lewis@dnb.nl, karsten.staehr@epbe.ee

The views expressed are those of the authors and do not necessarily represent the official views of Eesti Pank.

Contents

1. Introduction

2. The inflation criterion

3. Looking backward

4. Monte Carlo simulations

5. Conclusions

References

Appendix 1. Results from simulation experiments with identical distributions

The Maastricht Inflation Criterion: What is the Effect of Expansion of the European Union?, Working Papers of Eesti Pank No 11/2007 (PDF*)

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