Regional Real Exchange Rates and Phillips Curves in Monetary Unions: The U.S. and EMU

We use panel estimates of regional Phillips curves of the hybrid New-Keynesian type

to study price level convergence within the US and EMU. Regional inflation rates tend to

eliminate PPP deviations in both monetary unions, with average half lives between 3 and 4

years. The start of EMU did not greatly affect PPP reversion in the euro area. Where changes

in nominal exchange rates accounted for the bulk of the adjustment process before 1999, this

role was largely taken over by regional inflation differences since. Notwithstanding clear evidence

of forward-lookingness in the US, inflation persistence is substantial in both monetary unions.