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Balassa-Samuelson and Wage, Price and Unemployment Dynamics in the Spanish Transition to EMU Membership

  • Ordóñez, Javier
  • Jusélius, Katarina

This paper provides an empirical investigation of the wage, price and unemployment dynamics that have taken place in Spain during the last two decades. The aim of this paper is to shed light on the impact of the European economic integration on Spanish labour market and the convergence to a European level of prosperity. We found that the Balassa-Samuelson effect, product market competition, and capital liberalization have been the main driving forces in this period. The adjustment dynamics show that Spanish inflation has adjusted in the long run to the European purchasing power parity level (as measured by the German price level) corrected for the Balassa-Samuelson effect. In the medium run this long-run convergence was achieved by two types of Phillips curve mechanisms; one where the inflation/unemployment trade-off was triggered off for different levels of the interest rate and real wage costs, another one where the trade-off was a function of the real exchange rate and the interest rate. Excess wages and/or increasing cost levels in the tradable sector led to higher unemployment rather than higher prices. Thus, much of the burden of adjustment was carried by unemployment in this period.

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File URL: http://dx.doi.org/10.5018/economics-ejournal.ja.2009-4
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File URL: http://econstor.eu/bitstream/10419/27524/1/economics_2009-4.pdf
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Article provided by Kiel Institute for the World Economy in its journal Economics: The Open-Access, Open-Assessment E-Journal.

Volume (Year): 3 (2009)
Issue (Month): ()
Pages: 1-30

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Handle: RePEc:zbw:ifweej:7548
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  1. Juselius, Katarina & Toro, Juan, 2005. "Monetary transmission mechanisms in Spain: The effect of monetization, financial deregulation, and the EMS," Journal of International Money and Finance, Elsevier, vol. 24(3), pages 509-531, April.
  2. Samuel Bentolila & Juan J. Dolado & Juan F. Jimeno, 2007. "Does Immigration Affect the Phillips Curve? Some Evidence for Spain," Kiel Working Papers 1333, Kiel Institute for the World Economy.
  3. Bela Balassa, 1964. "The Purchasing-Power Parity Doctrine: A Reappraisal," Journal of Political Economy, University of Chicago Press, vol. 72, pages 584.
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  5. Kevin D. Hoover & Soren Johansen & Katarina Juselius, 2008. "Allowing the Data to Speak Freely: The Macroeconometrics of the Cointegrated Vector Autoregression," American Economic Review, American Economic Association, vol. 98(2), pages 251-55, May.
  6. Bjørnstad, Roger & Nymoen, Ragnar, 2008. "The New Keynesian Phillips Curve Tested on OECD Panel Data," Economics - The Open-Access, Open-Assessment E-Journal, Kiel Institute for the World Economy, vol. 2, pages 1-18.
  7. Fanelli, Luca, 2008. "Evaluating the New Keynesian Phillips Curve under VAR-Based Learning," Economics Discussion Papers 2008-15, Kiel Institute for the World Economy.
  8. Fanelli, Luca, 2008. "Evaluating New Keynesian Phillips Curve under VAR-Based Learning," Economics - The Open-Access, Open-Assessment E-Journal, Kiel Institute for the World Economy, vol. 2, pages 1-24.
  9. Søren Johansen & Katarina Juselius, 1992. "Identification of the Long-Run and the Short-Run Structure: An Application to the ISLM Model," Discussion Papers 92-04, University of Copenhagen. Department of Economics.
  10. Anindya Banerjee & Bill Russell, 2002. "Inflation and Measures of the Markup," Dundee Discussion Papers in Economics 130, Economic Studies, University of Dundee.
  11. Juselius, Mikael, 2008. "Testing the New Keynesian Model on U.S. and Euro Area Data," Economics Discussion Papers 2008-23, Kiel Institute for the World Economy.
  12. Colander, David C., 2008. "Economists, Incentives, Judgment, and Empirical Work," Economics Discussion Papers 2008-12, Kiel Institute for the World Economy.
  13. Neil R. Ericsson & John S. Irons & Ralph W. Tryon, 2000. "Output and Inflation in the Long Run," Amherst Economic Papers 2000.01, Amherst College, Department of Economics, revised 24 Oct 2000.
  14. David Colander, 2008. "The Economy as an Evolving Complex System III: Current Perspectives and Future Directions. Edited by LAWRENCE E. BLUME and STEVEN N. DURLAUF," Economica, London School of Economics and Political Science, vol. 75(297), pages 191-192, 02.
  15. Juselius, Katarina, 2006. "The Cointegrated VAR Model: Methodology and Applications," OUP Catalogue, Oxford University Press, number 9780199285679, March.
  16. Møller, Niels Framroze, 2008. "Bridging Economic Theory Models and the Cointegrated Vector Autoregressive Model," Economics Discussion Papers 2008-21, Kiel Institute for the World Economy.
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