TRENDS IN EUROPEAN PRODUCTIVITY: Implications for Real Exchange Rates, Real Interest Rates and Inflation Differentials
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. JEL classification:Download Info
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Paper provided by Oesterreichische Nationalbank (Austrian Central Bank) in its series Working Papers with number 27.Length: 38 pages
Date of creation: 06 Jun 1998
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Handle: RePEc:onb:oenbwp:27
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Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.Cited by:
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