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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 & Kowalski, Pawel & Wihlborg, Clas, 2007. "Poland. The EMU entry strategy vs. the monetary issues," MPRA Paper 42599, University Library of Munich, Germany, revised 2007.
  2. 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.
  3. Jimborean, R., 2011. "The Exchange Rate Pass-Through in the New EU Member States," Working papers, Banque de France 341, Banque de France.
  4. Edda Zoli, 2009. "Commodity Price Volatility, Cyclical Fluctuations, and Convergence," IMF Working Papers 09/41, International Monetary Fund.
  5. 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, Elsevier, vol. 27(2), pages 227-248, March.
  6. 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.
  7. Zsolt Darvas & Gy�rgy Szap�ry, 2008. "Euro Area Enlargement and Euro Adoption Strategies," European Economy - Economic Papers, Directorate General Economic and Monetary Affairs (DG ECFIN), European Commission 304, Directorate General Economic and Monetary Affairs (DG ECFIN), European Commission.
  8. 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.
  9. 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.
  10. Roman Horváth & Kamila Koprnická, 2008. "Inflation Differentials in EU New Member States: An Empirical Evidence," Working Papers IES, Charles University Prague, Faculty of Social Sciences, Institute of Economic Studies 2008/24, Charles University Prague, Faculty of Social Sciences, Institute of Economic Studies, revised Oct 2008.
  11. Hamza Bennani, 2013. "Does the ECB consider the persistence of inflation differentials?," Economics Bulletin, AccessEcon, vol. 33(3), pages 2129-2139.
  12. Kowalski, Tadeusz, 2012. "The economic and monetary union countries vs. the global crisis," MPRA Paper 37942, University Library of Munich, Germany.
  13. 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.
  14. Tomás Slacík, 2008. "(How) Will the Euro Affect Inflation in the Czech Republic? A contribution to the current debate," FIW Working Paper series, FIW 018, FIW.
  15. Hiranya Nath & Kiril Tochkov, 2013. "Relative inflation dynamics in the new EU member countries of Central and Eastern Europe," Empirical Economics, Springer, Springer, vol. 45(1), pages 1-22, August.
  16. 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.
  17. 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.
  18. 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, Bank of Estonia wp2010-04, Bank of Estonia, revised 22 Mar 2010.
  19. Karsten Staehr, 2008. "The Maastricht Inflation Criterion and the New EU Members from Central and Eastern Europe," Bank of Estonia Working Papers, Bank of Estonia 2008-04, Bank of Estonia, revised 30 Oct 2008.

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