This paper examines regional inflation divergence within the European EMU aiming at characterizing the properties of inflation differentials. The empirical evidence suggests that a process of price level convergence in the EMU is well on its way.

Three industrial organization (IO) models suggested by Dornbusch (1987) are here adapted to study the labor-cost effects on relative prices of tradable goods between the regions of a monetary union. The assumption of imperfect and segmented goods and labor markets makes the analysis best suited...