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TRENDS IN EUROPEAN PRODUCTIVITY: Implications for Real Exchange Rates, Real Interest Rates and Inflation Differentials

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Author Info
Matthew Canzoneri () (Georgetown University, Washington D.C.)
Robert Cumby () (Georgetown University, Washington D.C.)
Behzad Diba () (Georgetown University, Washinton D.C.)
Gwen Eudey (Federal Reserve Board, Washington D.C.)

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Abstract

The price of home goods relative to traded goods has risen faster in countries like Belgium, Italy, and Spain than it has in Germany. The observed relative-price trends are in line with sectoral trends in relative labor productivity. A neoclassical model with marginal-cost pricing, long run labor mobility within each country, and long-run PPP in the traded sector can account for the observed trends. As long as the productivity trends continue, countries like Belgium, Italy and Spain will experience equilibrium real appreciations against Germany and will have lower equilibrium real interest rates compared to Germany. Convergence in national inflation rates would require nominal appreciations against the DM to avoid competitiveness problems. In a monetary union, the equilibrium real appreciations and real interest-rate differentials can only come out in inflation differentials. The implied inflation differentials are five to ten times larger than those implied by differences in productivity trends across US regions.

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Publisher Info
Paper provided by Oesterreichische Nationalbank (Austrian Central Bank) in its series Working Papers with number 27.

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Length: 38 pages
Date of creation: 06 Jun 1998
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Handle: RePEc:onb:oenbwp:27

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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. Gian Maria Milesi-Ferretti & S. Micossi, 1994. "Real Exchange Rates and the Prices of Nontradable Goods," IMF Working Papers 94/19, International Monetary Fund.
  2. Jose De Gregorio & Alberto Giovannini & Holger C. Wolf, 1993. "International Evidence on Tradables and Nontradables Inflation," Working Papers 93-17, New York University, Leonard N. Stern School of Business, Department of Economics.
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  3. 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. [Downloadable!] (restricted)
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  4. Ng, S. & Perron, P., 1994. "Unit Root Tests ARMA Models with Data Dependent Methods for the Selection of the Truncation Lag," Cahiers de recherche 9423, Centre interuniversitaire de recherche en économie quantitative, CIREQ.
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  5. Kenneth A. Froot & Kenneth Rogoff, 1996. "Perspectives on PPP and Long-Run Real Exchange Rates," NBER Working Papers 4952, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  6. Asea, Patrick K & Corden, W Max, 1994. "The Balassa-Samuelson Model: An Overview," Review of International Economics, Blackwell Publishing, vol. 2(3), pages 191-200, October.
  7. Kenneth A. Froot & Kenneth Rogoff, 1991. "The EMS, the EMU, and the Transition to a Common Currency," NBER Working Papers 3684, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  8. Tamim Bayoumi & Barry Eichengreen, 1992. "Shocking Aspects of European Monetary Unification," NBER Working Papers 3949, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  9. Thomas Krueger & Jose De Gregorio & Alberto Giovannini, 1993. "The Behavior of Nontradable Goods Prices in Europe: Evidence and Interpretation," IMF Working Papers 93/45, International Monetary Fund.
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  10. Canzoneri, Matthew B & Diba, Behzad & Fudey, Gwen, 1996. "Trends in European Productivity and Real Exchange Rates: Implications for the Maastricht Convergence Criteria and for Inflation Targets after EMU," CEPR Discussion Papers 1417, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
  11. Matthew B. Canzoneri & Robert E. Cumby & Behzad Diba, 1996. "Relative Labor Productivity and the Real Exchange Rate in the Long Run: Evidence for a Panel of OECD Countries," NBER Working Papers 5676, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  12. Patrick K. Asea, 1994. "The Balassa-Samuelson Model: An Overview," UCLA Economics Working Papers 710, UCLA Department of Economics. [Downloadable!]
  13. Charles Engel, 1995. "Accounting for U.S. Real Exchange Rate Changes," NBER Working Papers 5394, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  14. Hall, Alastair R, 1994. "Testing for a Unit Root in Time Series with Pretest Data-Based Model Selection," Journal of Business & Economic Statistics, American Statistical Association, vol. 12(4), pages 461-70, October.
  15. Pasaran, M.H. & Im, K.S. & Shin, Y., 1995. "Testing for Unit Roots in Heterogeneous Panels," Cambridge Working Papers in Economics 9526, Faculty of Economics, University of Cambridge.
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  1. Stephen Cecchetti & Nelson C. Mark & Robert Sonora, 1999. "Price Level Convergence Among United States Cities: Lessons for the European Central Bank," Working Papers 99-01, Ohio State University, Department of Economics. [Downloadable!]
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  2. Vladislav Flek & Lenka Markova & Jiri Podpiera, 2002. "Sectoral Productivity and Real Exchange Rate Appreciation: Much Ado about Nothing?," Working Papers 2002/04, Czech National Bank, Research Department. [Downloadable!]
  3. António Portugal Duarte, 2005. "Purchasing power parity: an empirical study of three EMU countries," International Trade 0505005, EconWPA. [Downloadable!]
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  4. Ignazio Angeloni & Michael Ehrmann, 2007. "Euro Area Inflation Differentials," Topics in Macroeconomics, Berkeley Electronic Press, vol. 7(1), pages 1509-1509. [Downloadable!] (restricted)
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