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Real Convergence, Price Level Convergence and Inflation Differentials in Europe

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Author Info
Balázs Égert () (Oesterreichische Nationalbank, Foreign Research Division)

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Abstract

This paper provides a comprehensive review of the factors that can cause price levels to diverge and which are at the root of different inflation rates in Europe including the EU-27. Among others, we study the structural and cyclical factors influencing market and non-market-based service, house and goods prices, and we summarise some stylised facts emerging from descriptive statistics. Subsequently, we set out the possible mismatches between price level convergence and inflation rates. Having described in detail the underlying economic factors, we proceed to demonstrate the relative importance of these factors on observed inflation rates first in an accounting framework and then by relying on panel estimations. Our estimation results provide the obituary notice for the Balassa-Samuelson effect. Nevertheless, we show that other factors related to economic convergence may push up inflation rates in transition economies. Cyclical effects and regulated prices are found to be important drivers of inflation rates in an enlarged Europe. House prices matter to some extent in the euro area, whereas the exchange rate plays a prominent (but declining) role in transition economies.

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Publisher Info
Paper provided by Oesterreichische Nationalbank (Austrian Central Bank) in its series Working Papers with number 138.

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Length: 61 pages
Date of creation: 07 May 2007
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Handle: RePEc:onb:oenbwp:138

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Postal: Oesterreichische Nationalbank, Economic Studies Division, c/o Beate Hofbauer-Berlakovich, POB 61, A-1011 Vienna, Austria
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Related research
Keywords: price level inflation Balassa-Samuelson tradables house prices regulated prices Europe transition

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Find related papers by JEL classification:
E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Determination of Interest Rates; Term Structure of Interest Rates
E50 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - General
E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models
G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Mortgages
O52 - Economic Development, Technological Change, and Growth - - Economywide Country Studies - - - Europe

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References listed on IDEAS
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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!]
    Other versions:
  2. Buch, Claudia M, 2001. "Money Demand in Hungary and Poland," Applied Economics, Taylor and Francis Journals, vol. 33(8), pages 989-999, June. [Downloadable!] (restricted)
  3. Balazs Egert & Doris Ritzberger-Gruenwald & Maria Antoinette Silgoner, 2004. "Inflation Differentials in Europe: Past Experience and Future Prospects," Monetary Policy & the Economy, Oesterreichische Nationalbank (Austrian Central Bank), issue 1, pages 47-72, May. [Downloadable!]
  4. Shiu-Sheng Chen & Charles Engel, 2004. "Does "Aggregation Bias" Explain the PPP Puzzle?," NBER Working Papers 10304, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  5. Jarko Fidrmuc & Iikka Korhonen, 2006. "Meta-Analysis of the Business Cycle Correlation between the Euro Area and the CEECs," CESifo Working Paper Series CESifo Working Paper No. , CESifo GmbH. [Downloadable!]
    Other versions:
  6. Ignazio Angeloni & Michael Ehrmann, 2004. "Euro area inflation differentials," Working Paper Series 388, European Central Bank. [Downloadable!]
    Other versions:
  7. Mario J. Crucini & Mototsugu Shintani, 2006. "Persistence in Law-of-One-Price Deviations: Evidence from Micro-data," Levine's Bibliography 321307000000000311, UCLA Department of Economics. [Downloadable!]
    Other versions:
  8. Edward L. Glaeser & Joseph Gyourko & Raven Saks, 2003. "Why is Manhattan So Expensive? Regulation and the Rise in House Prices," Harvard Institute of Economic Research Working Papers 2020, Harvard - Institute of Economic Research. [Downloadable!]
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  9. Jose Manuel Campa & Linda S. Goldberg, 2002. "Exchange Rate Pass-Through into Import Prices: A Macro or Micro Phenomenon?," NBER Working Papers 8934, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  10. Egert, Balazs & Lommatzsch, Kirsten & Lahreche-Revil, Amina, 2006. "Real exchange rates in small open OECD and transition economies: Comparing apples with oranges?," Journal of Banking & Finance, Elsevier, vol. 30(12), pages 3393-3406, December. [Downloadable!] (restricted)
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  11. Balázs Egert & Dubravko Mihaljek, 2007. "Determinants of House Prices in Central and Eastern Europe," CESifo Working Paper Series CESifo Working Paper No. , CESifo GmbH. [Downloadable!]
    Other versions:
  12. Edward L. Glaeser & Joseph Gyourko, 2002. "The Impact of Zoning on Housing Affordability," Harvard Institute of Economic Research Working Papers 1948, Harvard - Institute of Economic Research. [Downloadable!]
    Other versions:
  13. Honohan, Patrick & Lane, Philip R., 2004. "Exchange Rates and Inflation Under EMU: An Update," CEPR Discussion Papers 4583, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
    Other versions:
  14. Jean Imbs & Haroon Mumtaz & Morten Ravn & Hélène Rey, 2005. "PPP Strikes Back: Aggregation and the Real Exchange Rate," The Quarterly Journal of Economics, MIT Press, vol. 120(1), pages 1-43, January.
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  15. Ignazio Angeloni & Luc Aucremanne & Matteo Ciccarelli, 2006. "Price setting and inflation persistence: did EMU matter?," Working Paper Series 597, European Central Bank. [Downloadable!]
  16. Martin Wagner & Jaroslava Hlouskova, 2004. "What's Really the Story with this Balassa-Samuelson Effect in the CEECs?," Diskussionsschriften dp0416, Universitaet Bern, Departement Volkswirtschaft. [Downloadable!]
  17. Ignazio Angeloni & Luc Aucremanne & Matteo Ciccarelli, 2006. "Price setting and inflation persistence: did EMU matter?," Economic Policy, CEPR, CES, MSH, vol. 21(46), pages 353-387, 04. [Downloadable!] (restricted)
  18. Peter Backé & Jarko Fidrmuc & Thomas Reininger & Franz Schardax, 2002. "Price Dynamics in Central and Eastern European EU Accession Countries," Working Papers 61, Oesterreichische Nationalbank (Austrian Central Bank). [Downloadable!]
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  19. Levin, Andrew & Lin, Chien-Fu & James Chu, Chia-Shang, 2002. "Unit root tests in panel data: asymptotic and finite-sample properties," Journal of Econometrics, Elsevier, vol. 108(1), pages 1-24, May. [Downloadable!] (restricted)
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  20. Chmielewski, Tomasz & Kot, Adam, 2006. "Impact of globalisation? Changes in the MTM in Poland," MPRA Paper 8386, University Library of Munich, Germany. [Downloadable!]
  21. Patrick Lünnemann & Thomas Y. Mathä, 2005. "Regulated and services’ prices and inflation persistence," Working Paper Series 466, European Central Bank. [Downloadable!]
  22. Zsolt Darvas & Andrew K. Rose & György Szapáry, 2005. "Fiscal Divergence and Business Cycle Synchronization: Irresponsibility is Idiosyncratic," NBER Working Papers 11580, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  23. Dexter, Albert S. & Levi, Maurice D. & Nault, Barrie R., 2002. "Sticky prices: the impact of regulation," Journal of Monetary Economics, Elsevier, vol. 49(4), pages 797-821, May. [Downloadable!] (restricted)
  24. Jeffrey A. Frankel & David C. Parsley & Shang-Jin Wei, 2005. "Slow Passthrough Around the World: A New Import for Developing Countries?," NBER Working Papers 11199, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  25. Darvas, Zsolt & Szapáry, György, 2005. "Business Cycle Sychronization in the Enlarged EU," CEPR Discussion Papers 5179, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
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  26. Joshua Gallin, 2003. "The long-run relationship between house prices and income: evidence from local housing markets," Finance and Economics Discussion Series 2003-17, Board of Governors of the Federal Reserve System (U.S.). [Downloadable!]
  27. Hofmann, Boris & Remsperger, Hermann, 2005. "Inflation differentials among the Euro area countries: Potential causes and consequences," Journal of Asian Economics, Elsevier, vol. 16(3), pages 403-419, June. [Downloadable!] (restricted)
  28. Fabrizio Coricelli & Balázs Égert & Ronald MacDonald, 2006. "Monetary Transmission Mechanism in Central & Eastern Europe: Gliding on a Wind of Change," William Davidson Institute Working Papers Series wp850, William Davidson Institute at the University of Michigan Stephen M. Ross Business School. [Downloadable!]
  29. Eickmeier, Sandra & Breitung, Jorg, 2006. "How synchronized are new EU member states with the euro area? Evidence from a structural factor model," Journal of Comparative Economics, Elsevier, vol. 34(3), pages 538-563, September. [Downloadable!] (restricted)
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