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Adjustment in EMU: Is Convergence Assured?

Author Info

  • Sebastian Dullien

    ()

    (HTW Berlin -- University of Applied Sciences)

  • Ulrich Fritsche

    ()

    (Department for Socioeconomics, Department for Economics, University of Hamburg)

  • Ingrid Groessl

    ()

    (Department for Socioeconomics, Department for Economics, University of Hamburg)

  • Michael Paetz

    ()

    (Department for Economics, University of Hamburg)

Abstract

Using a modified version of the model presented by Belke and Gros (2007), we analyze the stability of adjustment in a currency union. Using econometric estimates for parameter values we check the stability conditions for the 11 original EMU countries and Greece. We found significant instability in the model for a large number of countries. We then simulate the adjustment process for some empirically observed parameter values and find that even for countries with relatively smooth adjustment, the adjustment to a price shock in EMU might take several decades.

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File URL: http://www.wiso.uni-hamburg.de/repec/hepdoc/macppr_7_2009.pdf
File Function: First version, 2009
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Paper provided by Hamburg University, Department Wirtschaft und Politik in its series Macroeconomics and Finance Series with number 200907.

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Length: 36 pages
Date of creation: Sep 2009
Date of revision:
Handle: RePEc:hep:macppr:200907
Contact details of provider: Web page: https://www.wiso.uni-hamburg.de/

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Keywords: EMU; convergence; stability; inflation;

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Find related papers by JEL classification:
  • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
  • E61 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Policy Objectives; Policy Designs and Consistency; Policy Coordination
  • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models

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  1. Angeloni, Ignazio & Ehrmann, Michael, 2004. "Euro area inflation differentials," Working Paper Series 0388, European Central Bank.
  2. Lane, Philip R., 2006. "The Real Effects of EMU," CEPR Discussion Papers 5536, C.E.P.R. Discussion Papers.
  3. Álvarez, Luis J. & Dhyne, Emmanuel & Hoeberichts, Marco M. & Kwapil, Claudia & Le Bihan, Hervé & Lünnemann, Patrick & Martins, Fernando & Sabbatini, Roberto & Stahl, Harald & Vermeulen, Philip & Vilmu, 2005. "Sticky prices in the euro area: a summary of new micro evidence," Working Paper Series 0563, European Central Bank.
  4. Lucas, Robert Jr, 1976. "Econometric policy evaluation: A critique," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 1(1), pages 19-46, January.
  5. Ignazio Angelloni & Luc Aucremanne & Michael Ehrmann & Jordi Galí & Andrew Levin & Frank Smets, 2005. "New evidence on inflation persistence and price stickiness in the Euro area: Implications for macro modelling," Economics Working Papers 910, Department of Economics and Business, Universitat Pompeu Fabra.
  6. Stephen Cecchetti & Guy Debelle, 2005. "Has the inflation process changed?," BIS Working Papers 185, Bank for International Settlements.
  7. Sebastian Dullien & Ulrich Fritsche, 2007. "Anhaltende Divergenz der Lohnstückkostenentwicklung im Euroraum problematisch," DIW Wochenbericht, DIW Berlin, German Institute for Economic Research, vol. 74(22), pages 349-357.
  8. Belke, Ansgar H. & Gros, Daniel, 2007. "Instability of the Eurozone? On Monetary Policy, House Prices and Labor Market Reforms," IZA Discussion Papers 2547, Institute for the Study of Labor (IZA).
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