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EMU enlargement and convergence of pricelevels: Lessons from the German reunification

  • Philipp Maier
  • Paul Cavelaars

We analyse the possible impact of EMU enlargement on inflation rates in the ac-cession countries. We establish two main points: first, using a theoretical model we show that if large initial differences in price levels occur, even under very favourable circumstances the optimal path for price adjustments should be asym-metric, i.e. occuring mostly in the candidate countries. Second, based on data from the German reunification we quantify the inflationary effect of price level convergence in the accession countries. Our findings indicate that (trend) inflation rates in the EMU candidate countries are likely to increase sharply, whereas the impact on the current euro area is likely to be small, albeit not negligible. Our results support the need to allow for some flexibility in the exchange rate arrangements with the candidate countries to facilitate gradual price level convergence prior to EMU enlargement.

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Paper provided by Netherlands Central Bank, Monetary and Economic Policy Department in its series MEB Series (discontinued) with number 2003-06.

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Date of creation: Jun 2003
Date of revision:
Handle: RePEc:dnb:mebser:2003-06
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  9. Stephen G. Cecchetti & Nelson C. Mark & Robert J. Sonora, 2000. "Price Level Convergence Among United States Cities: Lessons for the European Central Bank," NBER Working Papers 7681, National Bureau of Economic Research, Inc.
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  13. John H. Rogers, 2001. "Price level convergence, relative prices, and inflation in Europe," International Finance Discussion Papers 699, Board of Governors of the Federal Reserve System (U.S.).
  14. Peter Backé & Jarko Fidrmuc & Thomas Reininger & Franz Schardax, 2002. "Price Dynamics in Central and Eastern European EU Accession," Working Papers 61, Oesterreichische Nationalbank (Austrian Central Bank).
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  16. George A. Akerlof & William R. Dickens & George L. Perry, 1996. "The Macroeconomics of Low Inflation," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 27(1), pages 1-76.
  17. Weber, Axel A. & Beck, Günter W., 2003. "Economic integration and the exchange rate regime: How damaging are currency crises?," CFS Working Paper Series 2001/13, Center for Financial Studies (CFS).
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