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EMU enlargement, inflation and adjustment of tradable goods prices: What to expect?

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  • Philipp Maier

Abstract

Inflation differentials resulting from EMU enlargement have so far mostly been discussed within the Balassa-Samuelson framework, i.e. resulting from inflation in nontradable goods. We analyse the inflationary consequences of convergenceof tradable goods' prices. Using disaggregated price level data, simulations show that inflation in the new EU member states might on average be 1.5-3.5 percentage points higher than in the current euro area (with considerable variation between the new EU members). These inflationary effects even exceed most simulations of the Balassa-Samuelson effect. The 'burden of adjustment' rests mainly on the shoulders of the new EU members if the European Central Bank sets monetary policy in response to inflation developments in the entire currency area. In contrast the impact of EMU enlargement on the current euro area is limited, due to the small economic weight of the new EU member states.

Suggested Citation

  • Philipp Maier, 2004. "EMU enlargement, inflation and adjustment of tradable goods prices: What to expect?," DNB Working Papers 010, Netherlands Central Bank, Research Department.
  • Handle: RePEc:dnb:dnbwpp:010
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    References listed on IDEAS

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    Cited by:

    1. Lein, Sarah M. & León-Ledesma, Miguel A. & Nerlich, Carolin, 2008. "How is real convergence driving nominal convergence in the new EU Member States?," Journal of International Money and Finance, Elsevier, vol. 27(2), pages 227-248, March.
    2. García Solanes, José & Torrejón-Flores, Fernando, 2009. "The Balassa-Samuelson Hypothesis in Developed Countries and Emerging Market Economies: Different Outcomes Explained," Economics - The Open-Access, Open-Assessment E-Journal, Kiel Institute for the World Economy (IfW), vol. 3, pages 1-24.
    3. Gabriele Galati & William R. Melick, 2006. "The evolving inflation process: an overview," BIS Working Papers 196, Bank for International Settlements.
    4. García-Solanes, José & Sancho-Portero, F. Israel & Torrejón-Flores, Fernando, 2008. "Beyond the Balassa-Samuelson effect in some new member states of the European Union," Economic Systems, Elsevier, vol. 32(1), pages 17-32, March.
    5. Riemer P. Faber & Ad C.J. Stokman, 2005. "Price Convergence in Europe from a Macro Perspective: Product Categories and Reliability," DNB Working Papers 034, Netherlands Central Bank, Research Department.

    More about this item

    Keywords

    Price level differences; convergence; EMU enlargement;

    JEL classification:

    • E30 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - General (includes Measurement and Data)
    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • E50 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - General
    • F40 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - General

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