The Inflation Target of the ECB: Does the Balassa-Samuelson Effect Matter?

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The Inflation Target of the ECB: Does the Balassa-Samuelson Effect Matter?

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Kirsten Lommatzsch
Silke Tober

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Kirsten Lommatzsch

Abstract

This paper argues that the Balassa-Samuelson effect is not of importance for the inflation target of the ECB. First, econometric tests of the Balassa-Samuelson effect suggest that its econometric significance is weak at best. Second, countries in the process of catching up require a real devaluation in the sector of tradable goods to maintain balance-of-payments equilibrium which counters the real appreciation resulting from a relative increase in service prices. It follows that whereas the Balassa-Samuelson effect could, at least in theory, be used to justify an inflation target well above zero, thedifference in productivity growth and thus the difference in the size of the Balassa-Samuelson effect between countries as such cannot.

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Paper provided by European University Institute (EUI), Robert Schuman Centre of Advanced Studies (RSCAS) in its series EUI-RSCAS Working Papers with number 19.

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Date of creation: 15 Oct 2004
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Handle: RePEc:erp:euirsc:p0136

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This paper has been announced in the following NEP Reports:

NEP-CBA-2004-11-07 (Central Banking)
NEP-EEC-2004-11-07 (European Economics)
NEP-IFN-2004-11-07 (International Finance)
NEP-MAC-2004-11-07 (Macroeconomics)
NEP-MON-2004-12-21 (Monetary Economics)

References listed on IDEAS
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Other versions:
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Other versions:
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Other versions:
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Other versions:
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Other versions:
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Full references

Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

Balázs Égert, 2005. "Equilibrium Exchange Rates in Southeastern Europe, Russia, Ukraine and Turkey: Healthy or (Dutch) Diseased?," William Davidson Institute Working Papers Series wp770, William Davidson Institute at the University of Michigan Stephen M. Ross Business School. [Downloadable!]
Other versions:
- Égert, Balázs, 2005. "Equilibrium exchange rates in Southeastern Europe, Russia, Ukraine and Turkey: Healthy or (Dutch) diseased?," BOFIT Discussion Papers 3/2005, Bank of Finland, Institute for Economies in Transition. [Downloadable!]
- Egert, Balazs, 2005. "Equilibrium exchange rates in South Eastern Europe, Russia, Ukraine and Turkey: Healthy or (Dutch) diseased?," Economic Systems, Elsevier, vol. 29(2), pages 205-241, June. [Downloadable!] (restricted)
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. [Downloadable!]
Kirsten Lommatzsch & Balazs Egert & Amina Lahreche-Revil, 2005. "The Stock-Flow Approach to the Real Exchange Rate of CEE Transition Economies:," Money Macro and Finance (MMF) Research Group Conference 2005 14, Money Macro and Finance Research Group. [Downloadable!]
Other versions:
- Balazs Egert & Amina Lahreche-Revil & Kirsten Lommatzsch, 2004. "The Stock-Flow Approach to the Real Exchange Rate of CEE Transition Economies," Working Papers 2004-15, CEPII research center. [Downloadable!]

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