EMU enlargement, inflation and adjustment of tradable goods prices: What to expect?
AbstractInflation differentials resulting from EMU enlargement have so far mostly been discussed within the Balassa-Samuelson framework, i.e. resulting from inflation in nontradable goods. We analyse the inflationary consequences of convergenceof tradable goods' prices. Using disaggregated price level data, simulations show that inflation in the new EU member states might on average be 1.5-3.5 percentage points higher than in the current euro area (with considerable variation between the new EU members). These inflationary effects even exceed most simulations of the Balassa-Samuelson effect. The 'burden of adjustment' rests mainly on the shoulders of the new EU members if the European Central Bank sets monetary policy in response to inflation developments in the entire currency area. In contrast the impact of EMU enlargement on the current euro area is limited, due to the small economic weight of the new EU member states.
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Bibliographic InfoPaper provided by Netherlands Central Bank, Research Department in its series DNB Working Papers with number 010.
Date of creation: Sep 2004
Date of revision:
Price level differences; convergence; EMU enlargement;
Find related papers by JEL classification:
- E30 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - General (includes Measurement and Data)
- E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
- E50 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - General
- F40 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - General
This paper has been announced in the following NEP Reports:
- NEP-ALL-2004-12-12 (All new papers)
- NEP-CBA-2004-12-12 (Central Banking)
- NEP-CMP-2004-12-12 (Computational Economics)
- NEP-EEC-2004-12-12 (European Economics)
- NEP-EEC-2004-12-27 (European Economics)
- NEP-MAC-2004-12-12 (Macroeconomics)
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