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Demand Shocks and Equilibrium Relative Prices in the Euro Area

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  • Pietro Cova

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.

Suggested Citation

  • Pietro Cova, 2008. "Demand Shocks and Equilibrium Relative Prices in the Euro Area," Rivista di Politica Economica, SIPI Spa, vol. 98(1), pages 89-133, January-F.
    • Handle: RePEc:rpo:ripoec:v:98:y:2008:i:1:p:89-133
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    Cited by:

    1. Anna Lipinska, 2006. "Monetary regime choice in the accession countries - a theoretical analysis," Computing in Economics and Finance 2006 243, Society for Computational Economics.
    2. Lipinska, Anna, 2008. "The Maastricht Convergence Criteria and Monetary Regimes for the EMU Accession Countries," MPRA Paper 16375, University Library of Munich, Germany.
    3. Ca' Zorzi, Michele & De Santis, Roberto A. & Zampolli, Fabrizio, 2005. "Welfare implications of joining a common currency," Working Paper Series 445, European Central Bank.

    More about this item

    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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