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Long-Run Determinants of Inflation Differentials in a Monetary Union

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Author Info
Filippo Altissimo
Pierpaolo Benigno
Diego Rodriguez Palenzuela

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Abstract

This paper analyzes the long-run determinants of inflation differentials in a monetary union. First, we aim at establishing some stylized facts relating the regional dispersion in headline inflation rates in the euro area as well as in the main components of the consumer price index. We find that a relatively large proportion of it occurs in the Service category of the EU's harmonized consumer price index (HICP). We then lay out a model of a monetary union with fully flexible prices, the long-run properties of which are analyzed. Our model departs in several respect from the Balassa-Samuelson hypotheses. Our results are in contrast with the result that movements in the real exchange rate are mainly driven by regionally asymmetric productivity shocks in the traded sectors. Our results point instead to relative variations in productivity in the non-traded sector as the primary cause of price and inflation differentials, with shocks to productivity in the traded sector being largely absorbed by movements in the terms of trade in the regional economies. These shocks are also found to largely drive the variability of real wages at the country level.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 11473.

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Date of creation: Jul 2005
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Handle: RePEc:nbr:nberwo:11473

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

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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.:
  1. Alan C. Stockman & Linda L. Tesar, 1991. "Tastes and technology in a two-country model of the business cycle: explaining international co-movements," Working Paper 9019, Federal Reserve Bank of Cleveland. [Downloadable!]
    Other versions:
  2. Frank Smets & Rafael Wouters, 2002. "An estimated stochastic dynamic general equilibrium model of the euro area," Working Paper Series 171, European Central Bank. [Downloadable!]
  3. Julio Rotemberg & Michael Woodford, 1997. "An Optimization-Based Econometric Framework for the Evaluation of Monetary Policy," NBER Chapters, in: NBER Macroeconomics Annual 1997, Volume 12, pages 297-361 National Bureau of Economic Research, Inc. [Downloadable!]
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(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.)

  1. Filippo Altissimo & Michael Ehrmann & Frank Smets, 2006. "Inflation persistence and price-setting behaviour in the euro area : a summary of the Inflation Persistence Network evidence," Research series 200610-7, National Bank of Belgium. [Downloadable!]
  2. Ashoka Mody & Franziska Ohnsorge, 2007. "Can Domestic Policies Influence Inflation?," IMF Working Papers 07/257, International Monetary Fund. [Downloadable!]
  3. Riccardo Cristadoro & Fabrizio Venditti & Giuseppe Saporito, 2008. "Forecasting inflation and tracking monetary policy in the euro area - does national information help?," Working Paper Series 900, European Central Bank. [Downloadable!]
    Other versions:
  4. Philip R. Lane, 2006. "The Real Effects of EMU," The Institute for International Integration Studies Discussion Paper Series iiisdp115, IIIS. [Downloadable!]
    Other versions:
  5. Iulia Traistaru-Siedschlag, 2006. "Macroeconomic Differentials and Adjustment in the Euro Area," Papers WP175, Economic and Social Research Institute (ESRI). [Downloadable!]
    Other versions:
  6. Balogun, Emmanuel Dele, 2008. "An alternative reconsideration of macroeconomic convergence criteria for West African Monetary Zone," MPRA Paper 11367, University Library of Munich, Germany. [Downloadable!]
  7. Joseph P. Byrne & Norbert Fiess, 2007. "Euro Area Inflation: Aggregation Bias and Convergence," Working Papers 2007_41, Department of Economics, University of Glasgow. [Downloadable!]
  8. Mirko Abbritti, 2007. "A "Simple" Currency Union Model with Labor Market Frictions, Real Wage Rigidities and Equilibrium Unemployment," HEI Working Papers 09-2007, Economics Section, The Graduate Institute of International Studies. [Downloadable!]
  9. Mirko Abbritti; Sebastian Weber, 2008. "Labor Market Rigidities and the Business Cycle: Price vs. Quantity Restricting Institutions," HEI Working Papers 01-2008, Economics Section, The Graduate Institute of International Studies, revised Jan 2008. [Downloadable!]
  10. Günter W. Beck & Kirstin Hubrich & Massimiliano Marcellino, 2006. "Regional inflation dynamics within and across euro area countries and a comparison with the US," Working Paper Series 681, European Central Bank. [Downloadable!]
  11. Barrett, Alan & Bergin, Adele & Fitz Gerald, John & Traistaru-Siedschlag, Iulia, 2006. "Economic Assessment of the Euro Area: Forecasts and Policy Analysis, Autumn Report 2006," Research Series, Economic and Social Research Institute (ESRI), number sustat22. [Downloadable!]
  12. Guenter Beck & Massimiliano Marcellino, 2006. "Regional Inflation Dynamics within and across Euro Area and a Comparison with the US," Computing in Economics and Finance 2006 338, Society for Computational Economics. [Downloadable!]
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