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Trends in European Productivity and Real Exchange Rates: Implications for the Maastricht Convergence Criteria and for Inflation Targets after EMU

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Author Info
Canzoneri, Matthew B
Diba, Behzad
Fudey, Gwen

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Abstract

While overall inflation has fallen dramatically in countries like Italy and Spain, inflation in the home good sector remains stubbornly higher than inflation in the traded good sector. If nominal exchange rates are fixed, these real appreciations imply an inflation differential with countries like Germany. We first show that the real appreciations can be explained largely by differences in productivity trends across the traded and non-traded goods sectors. We then analyse the implications of the trends in productivity for the consistency of the Maastricht convergence criteria, and we discuss the pressure productivity trends put on monetary policy in countries like Italy and Spain to meet the convergence criteria; we also discuss steps that might be taken to change the trends in productivity. Lastly, we calculate the implications of current trends in productivity for the differences in regional inflation under a common currency. Comparisons are made with regional productivity trends in the United States.

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Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 1417.

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Date of creation: Jun 1996
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Handle: RePEc:cpr:ceprdp:1417

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Related research
Keywords: Inflation; Maastricht Treaty; Productivity;

Find related papers by JEL classification:
E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
F02 - International Economics - - General - - - International Economic Order; Noneconomic International Organizations;; Economic Integration and Globalization: General
F11 - International Economics - - Trade - - - Neoclassical Models of Trade

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  1. Diego Rodriguez Palenzuela & Gonzalo Camba-Mendez & Juan Angel Garcia, 2003. "Relevant economic issues concerning the optimal rate of inflation," Working Paper Series 278, European Central Bank. [Downloadable!]
  2. Matthew Canzoneri & Robert Cumby & Behzad Diba & Gwen Eudey, 1998. "TRENDS IN EUROPEAN PRODUCTIVITY: Implications for Real Exchange Rates, Real Interest Rates and Inflation Differentials," Working Papers 27, Oesterreichische Nationalbank (Austrian Central Bank). [Downloadable!]
  3. Václav Žďárek & Jaromír Šindel, 2007. "Real And Nominal Convergence And The New Eu Member States - Actual State And Implications," Prague Economic Papers, University of Economics, Prague, vol. 2007(3), pages 195-219. [Downloadable!] (restricted)
  4. Ronald MacDonald, 2000. "The role of the exchange rate in economic growth: a euro-zone perspective," Research series 200005-5, National Bank of Belgium. [Downloadable!]
  5. Václav Žďárek, 2009. "Challenges for the new EU member states on the road to the Eurozone," International Economics and Economic Policy, Springer, vol. 6(2), pages 157-177, July. [Downloadable!] (restricted)
  6. Peter Backé & Jarko Fidrmuc & Thomas Reininger & Franz Schardax, 2002. "Price Dynamics in Central and Eastern European EU Accession Countries," Working Papers 61, Oesterreichische Nationalbank (Austrian Central Bank). [Downloadable!]
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