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Demand Shocks and Equilibrium Relative Prices in the Euro Area

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Author Info
Pietro Cova () (Banca d'Italia, Roma)
Abstract

This paper develops a two-sector, two-country model with monopolistic competition for a currency area. Within this framework we show that the same relative productivity and price trends suggested by the literature on the Balassa - Samuelson effect can be generated by shifts in expenditure shares that lead the existing capital stock in the currency area to move towards those sectors experiencing a rise in relative demand. Focusing on regional and sectoral inflation differentials across member countries of the European Monetary Union we find support for this demand-side explanation.

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File URL: http://www.rivistapoliticaeconomica.it/2008/gen-feb/cova.php
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Publisher Info
Article provided by SIPI Spa in its journal Rivista di Politica Economica.

Volume (Year): 98 (2008)
Issue (Month): 1 (January-February)
Pages: 89-133
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Handle: RePEc:rpo:ripoec:v:98:y:2008:i:1:p:89-133

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Find related papers by JEL classification:
E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics

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