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Adjustment in EMU: Is Convergence Assured?

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  • Sebastian Dullien

    ()
    (HTW Berlin -- University of Applied Sciences)

  • Ulrich Fritsche

    ()
    (Department for Socioeconomics, Department for Economics, University of Hamburg)

  • Ingrid Groessl

    ()
    (Department for Socioeconomics, Department for Economics, University of Hamburg)

  • Michael Paetz

    ()
    (Department for Economics, University of Hamburg)

Abstract

Using a modified version of the model presented by Belke and Gros (2007), we analyze the stability of adjustment in a currency union. Using econometric estimates for parameter values we check the stability conditions for the 11 original EMU countries and Greece. We found significant instability in the model for a large number of countries. We then simulate the adjustment process for some empirically observed parameter values and find that even for countries with relatively smooth adjustment, the adjustment to a price shock in EMU might take several decades.

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File URL: http://www.wiso.uni-hamburg.de/repec/hepdoc/macppr_7_2009.pdf
File Function: First version, 2009
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Bibliographic Info

Paper provided by Hamburg University, Department Wirtschaft und Politik in its series Macroeconomics and Finance Series with number 200907.

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Length: 36 pages
Date of creation: Sep 2009
Date of revision:
Handle: RePEc:hep:macppr:200907

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Web page: http://www.wiso.uni-hamburg.de/dwp
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Keywords: EMU; convergence; stability; inflation;

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  1. Álvarez, L. & Dhyne, E. & Hoeberichts, M. & Kwapil, C. & Le Bihan, H. & Lünnemann, P. & Martins, F. & Sabbatini, R. & Stahl,H. & Vermeulen, P. & Vilmunen, J., 2005. "Sticky Prices in the Euro Area: A Summary of New Micro Evidence," Working papers 138, Banque de France.
  2. Lane, Philip R., 2006. "The Real Effects of EMU," CEPR Discussion Papers 5536, C.E.P.R. Discussion Papers.
  3. Belke, Ansgar & Gros, Daniel, 2007. "Instability of the Eurozone? On Monetary Policy, House Prices and Labor Market Reforms," IZA Discussion Papers 2547, Institute for the Study of Labor (IZA).
  4. Stephen G. Cecchetti & Guy Debelle, 2006. "Has the inflation process changed?," Economic Policy, CEPR & CES & MSH, vol. 21(46), pages 311-352, 04.
  5. Ignazio Angeloni & Luc Aucremanne & Michael Ehrmann & Jordi Galí & Andrew Levin & Frank Smets, 2005. "New Evidence on Inflation Persistence and Price Stickiness in the Euro Area: Implications for Macro Modelling," Working Papers 242, Barcelona Graduate School of Economics.
  6. Angeloni Ignazio & Ehrmann Michael, 2007. "Euro Area Inflation Differentials," The B.E. Journal of Macroeconomics, De Gruyter, vol. 7(1), pages 1-36, August.
  7. Lucas, Robert Jr, 1976. "Econometric policy evaluation: A critique," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 1(1), pages 19-46, January.
  8. Sebastian Dullien & Ulrich Fritsche, 2007. "Anhaltende Divergenz der Lohnstückkostenentwicklung im Euroraum problematisch," DIW Wochenbericht, DIW Berlin, German Institute for Economic Research, vol. 74(22), pages 349-357.
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