External causes of Euro zone inflation differentials

Whether the Economic and Monetary Union (EMU) satisfies the criteria of an optimum currency area (OCA) has been the subject of much debate. Probably the greatest consensus exists on the trade criterion. In general authors conclude from the high levels of intra-EU trade that the European countries are closely interlinked. In that sense, they would constitute an optimal currency area. In this light, recent empirical evidence that external factors such as exchange rates and oil prices are able to explain inflation differentials between EMU countries is surprising. This paper re-examines the evidence using new and revised data and comes to the opposite conclusion.