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How is real convergence driving nominal convergence in the new EU Member States?

  • Lein, Sarah M.
  • León-Ledesma, Miguel A.
  • Nerlich, Carolin

We evaluate the empirical relevance of real convergence on the process of nominal convergence for the new EU Member States. We focus our discussion on two main channels: productivity growth and increased trade openness. Productivity growth can have a positive effect on price levels via the Balassa-Samuelson effect, whereas increased openness leads to reductions in mark-ups and costs and therefore can have a negative impact on prices. We empirically assess their relevance using a Structural VAR model to which we applied a model reduction algorithm. Our findings show that, in general, openness has had a negative impact and productivity growth a positive one on price level convergence with respect to the euro area.

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Article provided by Elsevier in its journal Journal of International Money and Finance.

Volume (Year): 27 (2008)
Issue (Month): 2 (March)
Pages: 227-248

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Handle: RePEc:eee:jimfin:v:27:y:2008:i:2:p:227-248
Contact details of provider: Web page: http://www.elsevier.com/locate/inca/30443

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