Long-Run Determinants of Inflation Differentials in a Monetary Union
AbstractThis 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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Bibliographic InfoPaper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 11473.
Date of creation: Jul 2005
Date of revision:
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Other versions of this item:
- Altissimo, Filippo & Benigno, Pierpaolo & Rodriguez Palenzuela, Diego, 2005. "Long-Run Determinants of Inflation Differentials in a Monetary Union," CEPR Discussion Papers 5149, C.E.P.R. Discussion Papers.
- 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
This paper has been announced in the following NEP Reports:
- NEP-ALL-2005-07-18 (All new papers)
- NEP-CBA-2005-07-18 (Central Banking)
- NEP-EEC-2005-07-18 (European Economics)
- NEP-IFN-2005-07-18 (International Finance)
- NEP-MAC-2005-07-18 (Macroeconomics)
- NEP-MON-2005-07-18 (Monetary Economics)
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- Stockman, Alan C & Tesar, Linda L, 1995. "Tastes and Technology in a Two-Country Model of the Business Cycle: Explaining International Comovements," American Economic Review, American Economic Association, vol. 85(1), pages 168-85, March.
- Alan C. Stockman & Linda L. Tesar, 1995. "Tastes and Technology in a Two-Country Model of the Business Cycle: Explaining International Comovements," NBER Working Papers 3566, National Bureau of Economic Research, Inc.
- Smets, Frank & Wouters, Raf, 2002. "An estimated stochastic dynamic general equilibrium model of the euro area," Working Paper Series 0171, European Central Bank.
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