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Persistent inflation differentials in Europe

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  • Eva Ortega

    (Banco de España)

Abstract

This paper studies the recent empirical evidence available on the evolution of the real exchange rates within the main European economies in order to understand the possible main determinants of future inflation differentials within the EMU. The real exchange rate is decomposed into that of the traded sector and the differential across countries of the relative price of the non traded sector. Persistent deviations from PPP are found, also in the traded sector. It is also found that the main factor behind the annual bilateral real appreciation with respect to Germany since 1995 has been the differential growth of relative non traded prices across countries. In the case of France, that differential was mainly explained by a different growth of relative labor productivities in the two economies, while in the case of Spain and Italy it was mainly due to the different growth of relative non-traded markups and wages, respectively.

Suggested Citation

  • Eva Ortega, 2003. "Persistent inflation differentials in Europe," Working Papers 0305, Banco de España.
    • Handle: RePEc:bde:wpaper:0305
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    File URL: http://www.bde.es/f/webbde/SES/Secciones/Publicaciones/PublicacionesSeriadas/DocumentosTrabajo/03/Fic/dt0305e.pdf
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    References listed on IDEAS

    as
    1. Canzoneri, Matthew B. & Cumby, Robert E. & Diba, Behzad, 1999. "Relative labor productivity and the real exchange rate in the long run: evidence for a panel of OECD countries," Journal of International Economics, Elsevier, vol. 47(2), pages 245-266, April.
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    Cited by:

    1. Heather Gibson & Jim Malley, 2008. "The Contribution of Sectoral Productivity Differentials to Inflation in Greece," Open Economies Review, Springer, vol. 19(5), pages 629-650, November.
    2. Ivo J.M. Arnold & Jan J.G. Lemmen, 2008. "Inflation Expectations and Inflation Uncertainty in the Eurozone: Evidence from Survey Data," Review of World Economics (Weltwirtschaftliches Archiv), Springer;Institut für Weltwirtschaft (Kiel Institute for the World Economy), vol. 144(2), pages 325-346, July.
    3. Consolo, Agostino & Koester, Gerrit & Nickel, Christiane & Porqueddu, Mario & Smets, Frank, 2021. "The need for an inflation buffer in the ECB’s price stability objective – the role of nominal rigidities and inflation differentials," Occasional Paper Series 279, European Central Bank.
    4. Filippo Altissimo & Pierpaolo Benigno & Diego Palenzuela, 2011. "Inflation Differentials in a Currency Area: Facts, Explanations and Policy," Open Economies Review, Springer, vol. 22(2), pages 189-233, April.
    5. Andrés, Javier & Ortega, Eva & Vallés, Javier, 2008. "Competition and inflation differentials in EMU," Journal of Economic Dynamics and Control, Elsevier, vol. 32(3), pages 848-874, March.
    6. Philipp Maier & Paul Cavelaars, 2003. "EMU enlargement and convergence of price levels: Lessons from the German reunification," Macroeconomics 0306016, University Library of Munich, Germany.
    7. Giorgio Canarella & Stephen Miller & Stephen Pollard, 2011. "The Global Financial Crisis and Stochastic Convergence in the Euro Area," International Advances in Economic Research, Springer;International Atlantic Economic Society, vol. 17(3), pages 315-333, August.
    8. Javier Andrés & Eva Ortega & Javier Vallés, 2003. "Market structure and inflation differentials in the European Monetary Union," Working Papers 0301, Banco de España.
    9. Campolmi, Alessia & Faia, Ester, 2011. "Labor market institutions and inflation volatility in the euro area," Journal of Economic Dynamics and Control, Elsevier, vol. 35(5), pages 793-812, May.
    10. Philipp Maier, 2010. "An Analysis Of International Price Differentials On Ebay," Contemporary Economic Policy, Western Economic Association International, vol. 28(3), pages 307-321, July.
    11. Andersson, Malin & Masuch, Klaus & Schiffbauer, Marc, 2009. "Determinants of inflation and price level differentials across the euro area countries," Working Paper Series 1129, European Central Bank.
    12. Nikolay Hristov & Oliver Hülsewig & Timo Wollmershäuser, 2014. "Financial Frictions and Inflation Differentials in a Monetary Union," Manchester School, University of Manchester, vol. 82(5), pages 549-595, September.
    13. Christian Proaño Acosta, 2007. "Inflation Differentials and Business Cycle Fluctuations in the European Monetary Union," IMK Working Paper 05-2007, IMK at the Hans Boeckler Foundation, Macroeconomic Policy Institute.
    14. David López-Salido & Fernando Restoy & Javier Vallés, 2005. "Inflation differentials in EMU: the Spanish case," Working Papers 0514, Banco de España.
    15. Mrs. Hanan Morsy & Ms. Florence Jaumotte, 2012. "Determinants of Inflation in the Euro Area: The Role of Labor and Product Market Institutions," IMF Working Papers 2012/037, International Monetary Fund.
    16. Faia, Ester & Campolmi, Alessia, 2006. "Cyclical inflation divergence and different labor market institutions in the EMU," Working Paper Series 619, European Central Bank.
    17. Marek Jarocinski, 2003. "Nominal and Real Convergence in Spain, Portugal and Greece During Their Accession to the EMU," CASE Network Studies and Analyses 0256, CASE-Center for Social and Economic Research.
    18. repec:kap:iaecre:v:17:y:2011:i:3:p:315-333 is not listed on IDEAS
    19. Philipp Maier, 2005. "A global village without borders? international price differentials at eBay," Proceedings, Board of Governors of the Federal Reserve System (U.S.).
    20. Carla Massidda & Paolo Mattana, 2008. "Regional productivity and relative prices dynamics: the case of Italy," The Annals of Regional Science, Springer;Western Regional Science Association, vol. 42(4), pages 945-966, December.
    21. repec:rre:publsh:v:36:y:2006:i:3:p:400-426 is not listed on IDEAS
    22. Adela Luque, 2005. "Skill mix and technology in Spain: evidence from firm level data," Working Papers 0513, Banco de España.
    23. Philipp Maier, 2004. "EMU enlargement, inflation and adjustment of tradable goods prices: What to expect?," DNB Working Papers 010, Netherlands Central Bank, Research Department.

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    More about this item

    JEL classification:

    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • F15 - International Economics - - Trade - - - Economic Integration

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