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A European Disease? Non-tradable Inflation and Real Interest Rate Divergence

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  • Sophie Piton

Abstract

This article studies the contribution of real interest rate divergence to the dynamics of the relative price of non-tradables within Europe. Extending the traditional Balassa–Samueslon effect, it shows that the real interest rate fall in the Euro area (EA) periphery following the single currency’s inception induced an increase in the relative price of non-tradable goods. Using a new data set, it documents the dynamics of the tradable and the non-tradable sectors over 1995–2013 and the expansion of the non-tradable sector in the periphery before the crisis. It then carries out an econometric estimation for 11 EA countries over 1995–2013 and quantifies the contribution of the pure Balassa–Samuelson effect and the impact of the interest rate on non-tradable relative prices. Diverging evolution in the interest rate impacted greatly the evolution of non-tradable relative prices within the EA over the period. In Greece, the fall in the real interest rate over 1995–2008 could explain almost half of the non-tradable price increase relative to the EA average, while in Germany the increase in the real interest rate might have contributed up to 7% of the decrease of the non-tradable price relative to the average of the EA. (JEL codes: F41, F45, E43).

Suggested Citation

  • Sophie Piton, 2017. "A European Disease? Non-tradable Inflation and Real Interest Rate Divergence," CESifo Economic Studies, CESifo Group, vol. 63(2), pages 210-234.
    • Handle: RePEc:oup:cesifo:v:63:y:2017:i:2:p:210-234.
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    File URL: http://hdl.handle.net/10.1093/cesifo/ifw018
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    Cited by:

    1. Ivan Etzo & Carla Massidda & Romano Piras, 2020. "Do Firms Follow Immigrants? Empirical Evidence From Italy," Tijdschrift voor Economische en Sociale Geografie, Royal Dutch Geographical Society KNAG, vol. 111(5), pages 718-737, December.
    2. Theodore Mariolis & Nikolaos Ntemiroglou & George Soklis, 2018. "The static demand multipliers in a joint production framework: comparative findings for the Greek, Spanish and Eurozone economies," Journal of Economic Structures, Springer;Pan-Pacific Association of Input-Output Studies (PAPAIOS), vol. 7(1), pages 1-20, December.
    3. Philippe Frocrain & Pierre-Noël Giraud, 2019. "The Evolution of Tradable and Non Tradable Employment: Evidence from France," Post-Print hal-01981428, HAL.
    4. Kobielarz, Michal, 2018. "The economics of monetary unions," Other publications TiSEM b0293536-68ec-4905-bffd-6, Tilburg University, School of Economics and Management.
    5. Andrea Papetti, 2021. "Population aging, relative prices and capital flows across the globe," Temi di discussione (Economic working papers) 1333, Bank of Italy, Economic Research and International Relations Area.
    6. Ma, Qiang & Murshed, Muntasir & Khan, Zeeshan, 2021. "The nexuses between energy investments, technological innovations, emission taxes, and carbon emissions in China," Energy Policy, Elsevier, vol. 155(C).
    7. Annie Tubadji & Peter Nijkamp, 2018. "Revisiting the Balassa–Samuelson effect: International tourism and cultural proximity," Tourism Economics, , vol. 24(8), pages 915-944, December.
    8. Philippe Frocrain & Pierre-Noël Giraud, 2017. "The evolution of tradable and non-tradable employment: evidence from France," Working Papers hal-01695159, HAL.
    9. Philippe Frocrain & Pierre-Noël Giraud, 2018. "The Evolution of Tradable and Non Tradable Employment: Evidence from France," Economie et Statistique / Economics and Statistics, Institut National de la Statistique et des Etudes Economiques (INSEE), issue 503-504, pages 97-107.
    10. João Alcobia & Ricardo Cabral, 2023. "The Dutch disease of the Euro Area peripheral member states," Working Papers REM 2023/0257, ISEG - Lisbon School of Economics and Management, REM, Universidade de Lisboa.

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    Keywords

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    JEL classification:

    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics
    • F45 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Macroeconomic Issues of Monetary Unions
    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects

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