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

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  • Philipp Maier
  • Paul Cavelaars

Abstract

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.

Suggested Citation

  • Philipp Maier & Paul Cavelaars, 2003. "EMU enlargement and convergence of pricelevels: Lessons from the German reunification," MEB Series (discontinued) 2003-06, Netherlands Central Bank, Monetary and Economic Policy Department.
  • Handle: RePEc:dnb:mebser:2003-06
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    References listed on IDEAS

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    Cited by:

    1. Pawel GAJEWSKI & Jakub KOWALSKI, "undated". "Price Convergence in the European Union Countries," EcoMod2004 330600057, EcoMod.
    2. Danijel Nestić, 2005. "Price Level Convergence: Croatia, Transition Countries and the EU," Working Papers 13, The Croatian National Bank, Croatia.

    More about this item

    Keywords

    Price level differences; convergence; EMU enlargement;

    JEL classification:

    • E50 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - General

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