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Reasons for Real Appreciation in Central Europe

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Author Info
Michael Brandmeier ()
Abstract

The real economic effects of the considerably high appreciation in Central European Economies (CEE) are controversially disputed in the eve of the European Monetary Union (EMU) entry of several CEE economies. The Balassa-Samuelson-effect was made responsible for the expectation of higher inflation rates in CEE than in the EMU in the next years. Higher inflation rates will deteriorate the price competitiveness of the export sectors in the CEE countries because of real appreciation. This paper focuses on the effects of labour productivity differences in several industrial and service sectors on the consumer prices. Labour productivity changes are affected by the technology impact on labour demand and by the relative wage increases following from tensions of regional labour markets because of rising prices and skilled labour shortage. Real appreciation is determined by labour productivity differences and by capital good imports. We conclude that the negative coherence between real appreciation and the endangered price competitiveness of the export sectors in CEE has to be taken into account, unless the negative experience of loss of competitiveness because of sudden real appreciation in Eastern Germany will take place on a large scale in the eastern part of the enlarged euro area.

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Publisher Info
Paper provided by cege – Center for European, Governance and Economic Development Research, University of Goettingen (Germany). in its series cege – Center for European, Governance and Economic Development Research Discussion Papers with number 55.

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Length: 43
Date of creation: 02 Jun 2006
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Handle: RePEc:got:cegedp:55

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Web page: http://www.cege.uni-goettingen.de
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Related research
Keywords: European Monetary Union; inflation differences; Balassa-Samuelson-effect; Central and Eastern Europe;

Find related papers by JEL classification:
E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
F33 - International Economics - - International Finance - - - International Monetary Arrangements and Institutions
F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics

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  1. Balázs Égert & Imed Drine & Kirsten Lommatzsch & Christophe Rault, 2002. "The Balassa-Samuelson effect in Central and Eastern Europe: Myth or reality?," William Davidson Institute Working Papers Series 483, William Davidson Institute at the University of Michigan Stephen M. Ross Business School. [Downloadable!]
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  2. Broeck, Mark De & Sløk, Torsten, 2001. "Interpreting real exchange rate movements in transition countries," BOFIT Discussion Papers 7/2001, Bank of Finland, Institute for Economies in Transition. [Downloadable!]
    Other versions:
  3. Michael Reutter & Hans-Werner Sinn, 2000. "The Minimum Inflation Rate for Euroland," CESifo Working Paper Series CESifo Working Paper No. , CESifo Group Munich. [Downloadable!]
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  4. Jones, Charles I, 1995. "R&D-Based Models of Economic Growth," Journal of Political Economy, University of Chicago Press, vol. 103(4), pages 759-84, August. [Downloadable!] (restricted)
  5. Darvas, Zsolt, 2001. "Exchange rate pass-through and real exchange rate in EU candidate countries," Discussion Paper Series 1: Economic Studies 2001,10, Deutsche Bundesbank, Research Centre. [Downloadable!]
  6. Jochen Michaelis & Heike Minich, 2004. "Inflationsdifferenzen im Euroraum - eine Bestandsaufnahme," cege – Center for European, Governance and Economic Development Research Discussion Papers 35, cege – Center for European, Governance and Economic Development Research, University of Goettingen (Germany).. [Downloadable!]
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  7. Alberola, E. & Tyrvainen, T., 1998. "Is There Scope for Inflation Differentials in EMU? An Empirical Evaluation of te Balassa-Samuelson Model in EMU Countries," Bank of Finland - Studies in Economics and Finance 15/98, Bank of Finland. Research Department..
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  8. Katja Rietzler & Kirsten Lommatzsch, 2001. "Inflationsunterschiede im Euroraum: muss die EZB ihr Stabilitätsziel revidieren?," Wochenbericht, DIW Berlin, German Institute for Economic Research, vol. 68(38), pages 591-597.
  9. Coricelli, Fabrizio & Jazbec, Bostjan, 2004. "Real exchange rate dynamics in transition economies," Structural Change and Economic Dynamics, Elsevier, vol. 15(1), pages 83-100, March. [Downloadable!] (restricted)
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  10. Gruner, Hans Peter & Hefeker, Carsten, 1999. " How Will EMU Affect Inflation and Unemployment in Europe?," Scandinavian Journal of Economics, Blackwell Publishing, vol. 101(1), pages 33-47, March. [Downloadable!] (restricted)
  11. Fischer, Christoph, 2002. "Real currency appreciation in accession countries: Balassa-Samuelson and investment demand," Discussion Paper Series 1: Economic Studies 2002,19, Deutsche Bundesbank, Research Centre. [Downloadable!]
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  12. Philipp Maier & Paul Cavelaars, 2003. "EMU enlargement and convergence of price levels: Lessons from the German reunification," Macroeconomics 0306016, EconWPA. [Downloadable!]
    Other versions:
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