Productivity Trends in Europe: Implications for Real Exchange Rates, Real Interest Rates, and Inflation

Review of International Economics (Impact Factor: 0.63). 08/2002; 10(3). DOI: 10.1111/1467-9396.00346


The paper examines a long–run (neoclassical) framework in which differences in productivity growth across sectors and countries lead to inflation differentials. In a currency union, these inflation differentials imply cross–country differentials in real interest rates. The authors estimate the likely size of these differentials for European Union countries, discuss the potential costs of persistent inflation differentials, and comment on the conflicts they may cause within Economic and Monetary Union (EMU). The analytical framework is a variant of the Balassa–Samuelson “productivity hypotheisis,” which relates sectoral productivity trends to trends in the relative price of home goods.

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    • "In fact, changes in the CPI-based real exchange rate can be disaggregated into three components: (1) the ratio of the relative price P T P N in the developing country relative to the more advanced country; (2) changes in the shares of tradable and non-tradable goods in 1 The vast literature on this topic estimates that the tradable sector productivity growth differential between the Euro-area and new EU members is between 1 percent and 4 percent, with most of the estimates above 2 percent. The trend appreciation of the real exchange rate in many of these economies has been documented extensively, ranging from 25 percent in Hungary to nearly 300 percent in Estonia and Latvia in the 1992-98 period (De Broeck and Slok [17]). 2 Empirical analysis of the B-S effect in new EU member countries and a discussion of the theoretical background can be found in De Gregorio et al. [18], Canzoneri et al. [8], Arratibel et al. [1], Csajbok and Csermely [15], Egert [23], Egert et al. [24], Cihak and Holub [9], Fischer [26], Buiter and Grafe [5], Pelkmans et al. [42] and Rogers [43] [44]. the consumption basket; and (3) the relative price of tradable goods in a common currency. "
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    ABSTRACT: We develop a general equilibrium model of an emerging market economy where productivity growth differentials between tradable and non-tradable sectors result in an equilibrium appreciation of the real exchange rate-the so-called Balassa-Samuelson effect. The paper explores the dynamic properties of this economy and the welfare implications of alternative policy rules. We show that the real exchange rate appreciation limits the range of policy rules that, with a given probability, keep inflation and exchange rate within predetermined numerical targets. We also find that the B-S effect raises by an order of magnitude the welfare loss associated with policy rules that prescribe active exchange rate management. Copyright (c)2008 The Ohio State University.
    Journal of money credit and banking 03/2008; 40(2-3):243-271. DOI:10.2139/ssrn.1263940 · 1.09 Impact Factor
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    • "Data periods focus on the 1970s, 1980s and into the 1990s. The results suggest inflation differentials of 2 percentage points (Alberola-Ila and Tyrvainen, 1998), 2.5 percentage points (Canzoneri et al, 2002; Lommatzsch and Tober, 2006) and, even, 4 percentage points (Sinn and Reutter, 2001). "
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    ABSTRACT: This paper estimates the magnitude of the Balassa-Samuelson effect for Greece. We calculate the effect directly, using sectoral national accounts data, which permits estimation of total factor productivity (TFP) growth in the tradeables and nontradeables sectors. Our results suggest that it is difficult to produce one estimate of the BS effect. Any particular estimate is contingent on the definition of the tradeables sector and the assumptions made about labour shares. Moreover, there is also evidence that the effect has been declining through time as Greek standards of living have caught up on those in the rest of the world and as the non-tradeables sector within Greece catches up with the tradeables.
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    • "The inference is that trade impacts of the euro could be expected to promote further economic convergence within the euro zone. Matthew Canzoneri et al (2002) analyze productivity trends and real exchange rates in Europe between 1973 and 1997. They conclude that if productivity trends over this period were to continue in the post euro period, euro-zone countries would exhibit trend CPI inflation between -1 percent and 2 percent from the EMU average. "
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    ABSTRACT: We analyze producer price developments in the transition from a national exchange rate regime to a monetary union. The focus is on the European Economic and Monetary Union (EMU). Stylized facts witness about an exploding gaps in producer-price inflation during the years immediately following the completion of the EMU. Price convergence is found to be an important driver throughout the entire euro period (1999-2005), but with no significant differences in speed compared to the pre euro period. Productivity growth had its primary effect in the first years and effective exchange-rate changes in the later years of the euro period.
    SSRN Electronic Journal 10/2006; DOI:10.2139/ssrn.957767
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