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Competition and inflation differentials in EMU

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  • Andrés, Javier
  • Ortega, Eva
  • Vallés, Javier

Abstract

In a monetary union, inflation rate differentials may be substantial over the business cycle. This paper parameterizes a monetary union with cross-country structural differences in (i) the elasticity of demand in the goods markets, (ii) the degree of price inertia and (iii) the preference for foreign goods in consumption. The model, calibrated to reproduce two large EMU countries, is able to generate non-negligible inflation differentials in response to symmetric shocks. The mechanism of price discrimination is the most important one, but moderate differences in the degree of openness have sizeable effects on the dispersion of inflation rates if idiosyncratic shocks predominate.

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Bibliographic Info

Article provided by Elsevier in its journal Journal of Economic Dynamics and Control.

Volume (Year): 32 (2008)
Issue (Month): 3 (March)
Pages: 848-874

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Handle: RePEc:eee:dyncon:v:32:y:2008:i:3:p:848-874

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Citations

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Cited by:
  1. Auray, Stéphane & Eyquem, Aurélien & Poutineau, Jean-Christophe, 2010. "The Welfare Gains Of Trade Integration In The European Monetary Union," Macroeconomic Dynamics, Cambridge University Press, Cambridge University Press, vol. 14(05), pages 645-676, November.
  2. Ángel Estrada & Jordi Galí & David López-Salido, 2013. "Patterns of Convergence and Divergence in the Euro Area," NBER Working Papers 19561, National Bureau of Economic Research, Inc.
  3. Nikolay Hristov & Oliver Hülsewig & Timo Wollmershäuser, 2014. "Financial Frictions and Inflation Differentials in a Monetary Union," Manchester School, University of Manchester, vol. 82(5), pages 549-595, 09.
  4. Campolmi, Alessia & Faia, Ester, 2011. "Labor market institutions and inflation volatility in the euro area," Journal of Economic Dynamics and Control, Elsevier, Elsevier, vol. 35(5), pages 793-812, May.
  5. Heiner Mikosch, 2012. "Sticky Prices, Competition and the Phillips Curve," KOF Working papers 11-294, KOF Swiss Economic Institute, ETH Zurich.
  6. Filippo Altissimo & Pierpaolo Benigno & Diego Palenzuela, 2011. "Inflation Differentials in a Currency Area: Facts, Explanations and Policy," Open Economies Review, Springer, vol. 22(2), pages 189-233, April.
  7. Mykhaylova, Olena, 2009. "Welfare implications of country size in a monetary union," MPRA Paper 23323, University Library of Munich, Germany.
  8. D'Adamo, Gaetano & Rovelli, Riccardo, 2013. "Labor Market Institutions and the Response of Inflation to Macro Shocks in the EU: A Two-Sector Analysis," IZA Discussion Papers 7616, Institute for the Study of Labor (IZA).
  9. Hanan Morsy & Florence Jaumotte, 2012. "Determinants of Inflation in the Euro Area," IMF Working Papers 12/37, International Monetary Fund.
  10. Ángel Estrada, 2009. "The mark-ups in the Spanish economy: international comparison and recent evolution," Banco de Espa�a Working Papers 0905, Banco de Espa�a.

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