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Persistent inflation differentials in Europe

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  • Eva Ortega

    ()
    (Banco de España)

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    Abstract

    This paper studies the recent empirical evidence available on the evolution of the real exchange rates within the main European economies in order to understand the possible main determinants of future inflation differentials within the EMU. The real exchange rate is decomposed into that of the traded sector and the differential across countries of the relative price of the non traded sector. Persistent deviations from PPP are found, also in the traded sector. It is also found that the main factor behind the annual bilateral real appreciation with respect to Germany since 1995 has been the differential growth of relative non traded prices across countries. In the case of France, that differential was mainly explained by a different growth of relative labor productivities in the two economies, while in the case of Spain and Italy it was mainly due to the different growth of relative non-traded markups and wages, respectively.

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    File URL: http://www.bde.es/f/webbde/SES/Secciones/Publicaciones/PublicacionesSeriadas/DocumentosTrabajo/03/Fic/dt0305e.pdf
    File Function: First version, May 2003
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    Bibliographic Info

    Paper provided by Banco de Espa�a in its series Banco de Espa�a Working Papers with number 0305.

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    Length: 24 pages
    Date of creation: May 2003
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    Handle: RePEc:bde:wpaper:0305

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    1. Canzoneri, Matthew B & Cumby, Robert & Diba, Behzad, 1996. "Relative Labour Productivity and the Real Exchange Rate in the Long Run: Evidence for a Panel of OECD Countries," CEPR Discussion Papers 1464, C.E.P.R. Discussion Papers.
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    Cited by:
    1. Philipp Maier & Paul Cavelaars, 2003. "EMU enlargement and convergence of pricelevels: Lessons from the German reunification," MEB Series (discontinued) 2003-06, Netherlands Central Bank, Monetary and Economic Policy Department.
    2. Heather D. Gibson & Jim Malley, 2007. "The Contribution of Sectoral Productivity Differentials to Inflation in Greee," Working Papers 63, Bank of Greece.
    3. Campolmi, Alessia & Faia, Ester, 2006. "Cyclical inflation divergence and different labor market institutions in the EMU," Working Paper Series 0619, European Central Bank.
    4. Ivo J. M. Arnold & Jan J.G. Lemmen, 2006. "Inflation Expectations and Inflation Uncertainty in the Eurozone: Evidence from Survey Data," CESifo Working Paper Series 1667, CESifo Group Munich.
    5. Christian Proaño Acosta, 2007. "Inflation Differentials and Business Cycle Fluctuations in the European Monetary Union," IMK Working Paper 05-2007, IMK at the Hans Boeckler Foundation, Macroeconomic Policy Institute.
    6. Campolmi, Alessia & Faia, Ester, 2011. "Labor market institutions and inflation volatility in the euro area," Journal of Economic Dynamics and Control, Elsevier, vol. 35(5), pages 793-812, May.
    7. Philipp Maier, 2005. "A global village without borders? international price differentials at eBay," Proceedings, Board of Governors of the Federal Reserve System (U.S.).
    8. Andrés, Javier & Ortega, Eva & Vallés, Javier, 2008. "Competition and inflation differentials in EMU," Journal of Economic Dynamics and Control, Elsevier, vol. 32(3), pages 848-874, March.
    9. Javier Andrés & Eva Ortega & Javier Vallés, 2003. "Market structure and inflation differentials in the European Monetary Union," Banco de Espa�a Working Papers 0301, Banco de Espa�a.
    10. 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.
    11. Carla Massidda & Paolo Mattana, 2008. "Regional productivity and relative prices dynamics: the case of Italy," The Annals of Regional Science, Springer, vol. 42(4), pages 945-966, December.

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