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Real Convergence, Price Level Convergence and Inflation Differentials in Europe

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  • Balázs Egert

Abstract

This paper provides a comprehensive review of the factors that can cause price levels to diverge and which are at the root of different inflation rates in Europe including the EU-27. Among others, we study the structural and cyclical factors influencing market and non-market-based service, house and goods prices, and we summarise some stylised facts emerging from descriptive statistics. Subsequently, we set out the possible mismatches between price level convergence and inflation rates. Having described in detail the underlying economic factors, we proceed to demonstrate the relative importance of these factors on observed inflation rates first in an accounting framework and then by relying on panel estimations. Our estimation results provide the obituary notice for the Balassa-Samuelson effect. Nevertheless, we show that other factors related to economic convergence may push up inflation rates in transition economies. Cyclical effects and regulated prices are found to be important drivers of inflation rates in an enlarged Europe. House prices matter to some extent in the euro area, whereas the exchange rate plays a prominent (but declining) role in transition economies.

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Paper provided by CESifo Group Munich in its series CESifo Working Paper Series with number 2127.

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Date of creation: 2007
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Handle: RePEc:ces:ceswps:_2127

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Keywords: price level; inflation; Balassa-Samuelson; tradables; house prices; regulated prices; Europe; transition;

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Cited by:
  1. Kowalski, Tadeusz & Shachmurove, Yochanan, 2014. "The reaction of the U.S. and the European Monetary Union to recent global financial crises," Global Finance Journal, Elsevier, vol. 25(1), pages 27-47.
  2. Klaus Regling & Servaas Deroose & Reinhard Felke & Paul Kutos, 2010. "The Euro After Its First Decade : Weathering the Financial Storm and Enlarging the Euro Area," Governance Working Papers 22817, East Asian Bureau of Economic Research.
  3. Kowalski, Tadeusz & Pietrzykowski, Maciej, 2010. "The economic and monetary union vs. shifts in competitiveness of member states," MPRA Paper 33995, University Library of Munich, Germany.
  4. Lein, Sarah M. & León-Ledesma, Miguel A. & Nerlich, Carolin, 2008. "How is real convergence driving nominal convergence in the new EU Member States?," Journal of International Money and Finance, Elsevier, vol. 27(2), pages 227-248, March.
  5. Edda Zoli, 2009. "Commodity Price Volatility, Cyclical Fluctuations, and Convergence," IMF Working Papers 09/41, International Monetary Fund.
  6. Zsolt Darvas & Gyorgy Szapary, 2008. "Euro Area Enlargement and Euro Adoption Strategies," IEHAS Discussion Papers 0824, Institute of Economics, Centre for Economic and Regional Studies, Hungarian Academy of Sciences.
  7. Dubravko Mihaljek & Marc Klau, 2008. "Catching-up and inflation in transition economies: the Balassa-Samuelson effect revisited," BIS Working Papers 270, Bank for International Settlements.
  8. Przystupa, Jan, 2009. "Approaching a problem of the long-run real equilibrium exchange rate of Polish zloty while entering the ERM-2 and Euro zone," MPRA Paper 19549, University Library of Munich, Germany.
  9. Karsten Staehr, 2008. "The Maastricht Inflation Criterion and the New EU Members from Central and Eastern Europe," Bank of Estonia Working Papers 2008-04, Bank of Estonia, revised 30 Oct 2008.
  10. Mahlich, Jörg & Sindern, Jörn & Suppliet, Moritz, 2014. "Vergleichbarkeit internationaler Arzneimittelpreise: Internationale Preisreferenzierung in Deutschland durch das AMNOG," DICE Ordnungspolitische Perspektiven 60, Heinrich‐Heine‐Universität Düsseldorf, Düsseldorf Institute for Competition Economics (DICE).
  11. Kowalski, Tadeusz & Kowalski, Pawel & Wihlborg, Clas, 2007. "Poland. The EMU entry strategy vs. the monetary issues," MPRA Paper 42599, University Library of Munich, Germany, revised 2007.
  12. Roman Horvath & Kamila Koprnicka, 2008. "Inflation Differentials in EU New Member States: An Empirical Evidence," William Davidson Institute Working Papers Series wp937, William Davidson Institute at the University of Michigan.
  13. Jimborean, Ramona, 2013. "The exchange rate pass-through in the new EU member states," Economic Systems, Elsevier, vol. 37(2), pages 302-329.
  14. John Beirne, 2009. "Vulnerability of inflation in the new EU Member States to country-specific and global factors," Economics Bulletin, AccessEcon, vol. 29(2), pages 1420-1431.
  15. Kowalski, Tadeusz, 2012. "The economic and monetary union countries vs. the global crisis," MPRA Paper 37942, University Library of Munich, Germany.
  16. Roman Horváth & Kamila Koprnická, 2008. "Inflation Differentials in New EU Member States: Empirical Evidence," Czech Journal of Economics and Finance (Finance a uver), Charles University Prague, Faculty of Social Sciences, Charles University Prague, Faculty of Social Sciences, vol. 58(07-08), pages 318-328, Oktober.
  17. Karsten Staehr, 2010. "Income convergence and inflation in Central and Eastern Europe : does the sun always rise in the East," Bank of Estonia Working Papers wp2010-04, Bank of Estonia, revised 22 Mar 2010.
  18. Hamza Bennani, 2013. "Does the ECB consider the persistence of inflation differentials?," Economics Bulletin, AccessEcon, vol. 33(3), pages 2129-2139.
  19. Hiranya Nath & Kiril Tochkov, 2013. "Relative inflation dynamics in the new EU member countries of Central and Eastern Europe," Empirical Economics, Springer, vol. 45(1), pages 1-22, August.
  20. Tomás Slacík, 2008. "(How) Will the Euro Affect Inflation in the Czech Republic? A contribution to the current debate," FIW Working Paper series 018, FIW.

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