Financial Frictions And Inflation Differentials In A Monetary Union

This paper employs a stylized New Keynesian DSGE model for a monetary union to analyze whether cyclical inflation differentials can be explained by cross-country differences concerning the characteristics of financial markets. The authors' results suggest that empirically plausible degrees of heterogeneity with respect to two important credit market characteristics - namely the fraction of borrowers and to a lesser extent the loan-to-value ratio-generate inflation differentials that are similar to those implied by structural differences with respect to price inertia and the degree of competitiveness.