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Demand Shocks and Equilibrium Relative Prices in the Euro Area

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  • Pietro Cova

Abstract

This paper develops a two-sector, two-country model with monopolistic competition for a currency area. Within this framework we show that the same relative productivity and price trends suggested by the literature on the Balassa - Samuelson effect can be generated by shifts in expenditure shares that lead the existing capital stock in the currency area to move towards those sectors experiencing a rise in relative demand. Focusing on regional and sectoral inflation differentials across member countries of the European Monetary Union we find support for this demand-side explanation.

Suggested Citation

  • Pietro Cova, 2008. "Demand Shocks and Equilibrium Relative Prices in the Euro Area," Rivista di Politica Economica, SIPI Spa, vol. 98(1), pages 89-133, January-F.
    • Handle: RePEc:rpo:ripoec:v:98:y:2008:i:1:p:89-133
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    Cited by:

    1. Lipinska, Anna, 2008. "The Maastricht Convergence Criteria and Monetary Regimes for the EMU Accession Countries," MPRA Paper 16375, University Library of Munich, Germany.
    2. Ca' Zorzi, Michele & De Santis, Roberto A. & Zampolli, Fabrizio, 2005. "Welfare implications of joining a common currency," Working Paper Series 445, European Central Bank.
    3. Anna Lipinska, 2006. "Monetary regime choice in the accession countries - a theoretical analysis," Computing in Economics and Finance 2006 243, Society for Computational Economics.

    More about this item

    JEL classification:

    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics

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