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Inflation and Productivity Differentials in EMU

Author

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  • Paul De Grauwe
  • Frauke Skudelny

Abstract

The aim of this paper is to find out whether the Balassa-Samuelson effect is important in EMU. We use panel data going from 1970 to 1995 for the current EU members in order to estimate the long run effect of bilateral differences in productivity growth differential between the traded and non-traded goods sector on bilateral inflation differentials. The regression results indicate a significant effect of the productivity differential, as proposed by the theory. According to our regression results, the impact of a productivity shock on the inflation differential can be quite substantial, going up to an 8% increase in the inflation differential.

Suggested Citation

  • Paul De Grauwe & Frauke Skudelny, 2000. "Inflation and Productivity Differentials in EMU," Working Papers Department of Economics ces0015, KU Leuven, Faculty of Economics and Business, Department of Economics.
  • Handle: RePEc:ete:ceswps:ces0015
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    Cited by:

    1. Kirsten Lommatzsch & Silke Tober, 2006. "Euro-Area Inflation: does the Balassa–Samuelson effect matter?," International Economics and Economic Policy, Springer, vol. 3(2), pages 105-136, November.
    2. Jochen Michaelis & Heike Minich, 2004. "Inflationsdifferenzen im Euroraum - eine Bestandsaufnahme," Aussenwirtschaft, University of St. Gallen, School of Economics and Political Science, Swiss Institute for International Economics and Applied Economics Research, vol. 59(04), pages 379-405, December.
    3. repec:got:cegedp:35 is not listed on IDEAS
    4. Paul de Grauwe & Gunther Schnabl, 2004. "Nominal versus Real Convergence with Respect to EMU Accession.How to Cope with the Balassa-Samuelson Dilemma," EUI-RSCAS Working Papers 20, European University Institute (EUI), Robert Schuman Centre of Advanced Studies (RSCAS).
    5. M. Katsimi, 2004. "Inflation divergence in the euro area: the Balassa-Samuelson effect," Applied Economics Letters, Taylor & Francis Journals, vol. 11(5), pages 329-332.
    6. repec:got:cegedp:55 is not listed on IDEAS
    7. Gunther Schnabl & Paul De Grauwe, 2004. "Nominal versus Real Convergence with Respect to EMU Accession - EMU Entry Scenarios for the New Member States," International Finance 0403008, EconWPA, revised 16 Feb 2005.
    8. Daniel Gros & Carsten Hefeker, 2002. "Common Monetary Policy with Asymmetric Shocks," CESifo Working Paper Series 705, CESifo Group Munich.
    9. Brandmeier, Michael, 2006. "Reasons for real appreciation in Central Europe," Center for European, Governance and Economic Development Research Discussion Papers 55, University of Goettingen, Department of Economics.

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