Determinants of Inflation in the Eurozone: Evidence from Germany, Spain, and Greece Using Panel Data and Machine Learning

This paper examines why inflation differs across Germany, Spain, and Greece despite all three countries operating under a common monetary policy set by the European Central Bank. While these countries share the same currency and interest rates, their inflation patterns have varied significantly over time. This study investigates whether countryspecific macroeconomic factors, such as GDP, unemployment, bond yields, energy prices, and money supply, helps explain these differences. Using panel data methods, the analysis estimates both fixed and random effects models and performs a Hausman test to determine the most appropriate specification. The results indicate that the fixed effects model is preferred, suggesting that country-specific factors play an important role in explaining inflation. The paper also uses a machine learning approach using LASSO regression to evaluate the relevance of each variable. The findings show that all variables contribute to explaining inflation and that domestic economic conditions remain important even within a shared monetary system. Overall, the results highlight the limitations of a one-size-fitsall monetary policy and emphasize the role of country-level differences in shaping inflation dynamics across the eurozone.