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Prices, Wages and Inflation after the Euro - What Europeans Shoud or Should not Expect

Author

Listed:
  • Giancarlo Corsetti
  • John Flemming
  • Seppo Honkapohja
  • Willi Leibfritz
  • Gilles Saint-Paul
  • Hans-Werner Sinn
  • Xavier Vives

Abstract

This chapter addresses questions about the effect of the introduction of the euro on price differentials across the Union and also on the cost of capital in its member countries, which may account for capital flows from the slow growing centre to the more buoyant peripheral states. Nominal interest rates on government securities have converged virtually completely with the announcement and introduction of the euro, indicating that risk premia resulting from uncertain exchange rates and other causes have disappeared. As these premia are generally believed to have been higher in the peripheral states, these should now be benefiting from a reallocation of capital in their favour. As a result, labour productivity and prices of goods that are not traded internationally can be expected to rise faster than would have been the case without the euro. A sizeable inflation differential among the Euro countries is a natural aspect of the real convergence process that has been brought about by European integration in general and by the euro in particular. So, while high inflation at time of booms in domestic demand may be a useful way to contain domestic imbalances, prices and wages then need to come down after the boom is over. The adoption of policies promoting wage and price flexibility is a key step in the future of the Euro area.

Suggested Citation

  • Giancarlo Corsetti & John Flemming & Seppo Honkapohja & Willi Leibfritz & Gilles Saint-Paul & Hans-Werner Sinn & Xavier Vives, 2002. "Prices, Wages and Inflation after the Euro - What Europeans Shoud or Should not Expect," EEAG Report on the European Economy, CESifo Group Munich, vol. 0, pages 48-56, April.
  • Handle: RePEc:ces:eeagre:v::y:2002:i::p:48-56
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    References listed on IDEAS

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    1. Corsetti, Giancarlo & Dedola, Luca, 2005. "A macroeconomic model of international price discrimination," Journal of International Economics, Elsevier, vol. 67(1), pages 129-155, September.
    2. Michael Reutter & Hans-Werner Sinn, 2000. "The Minimum Inflation Rate for Euroland," CESifo Working Paper Series 377, CESifo Group Munich.
    3. Giancarlo Corsetti & Luca Dedola, 2002. "Macroeconomics of international price discrimination," International Finance Discussion Papers 744, Board of Governors of the Federal Reserve System (U.S.).
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