Productivity Trends in Europe: Implications for Real Exchange Rates, Real Interest Rates, and Inflation
ABSTRACT 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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ABSTRACT: Purpose – The financial crisis starting in 2008 made many European countries opt for a change of exchange rate regime. The choice of price measure as an entry requirement to the European Economic and Monetary Union (EMU) and as input in the monetary policy decision process re-appeared as an important political and research issue. This paper aims to argue that, considering the importance of producer prices in international competition, their role is underplayed by policy makers and researchers. Design/methodology/approach – Producer prices are analyzed in the transition from national exchange-rate regimes to the EMU for 13 two-digit manufacturing sectors in the first 11 countries to adopt the Euro. Findings – It was found that significant price convergence before 1993-1998, but no or modest evidence of convergence after 1998-2005 when the Euro was introduced. This pattern is partly different from what prior studies have found for consumer prices, and is consistent with the change of exchange rate regime to a monetary union anchoring inflation rates. A conditional ß-convergence analysis reveals effective exchange-rate changes and differences in cyclicality as important determinants of price convergence, suggesting that import of inflation is an important determinant of price developments in the EMU. Research limitations/implications – The paper concludes that considering the role of producer prices and their deviating pattern from consumer prices, producer prices are underplayed in the research and deserve more attention. It is argued that increased attention to producer prices is warranted. Practical implications – Focusing monetary policymaking on consumer prices alone appears inefficient. Rather, then, support for the trade-off approach in monetary policy-making is supported. Social implications – In considering different solutions to the financial crisis, increasing attention should be paid to the development of producer prices. Originality/value – This is the first study to focus on producer prices in the research on the transition from a national exchange rate regime to a membership of a monetary union.International Journal of Managerial Finance 04/2011; 7(2):153-178.
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ABSTRACT: We apply Purchasing Power Parity (PPP) theory to the analysis of long- run equilibrium in the foreign exchange market. We study the case of Portugal vis-à-vis Germany and Spain, and the case of Spain vis-à-vis Germany, in the period 1960-1990. The empirical analysis was based on unit-root testing (using ADF tests) and Johansen’s methodology for the study of co-integration. We worked with linear long-run relationships based exclusively on PPP, as well as with long-run relations that also allowed for the effect of interest rates. In a situation in which PPP does not hold, one could think that on account of some “natural reason” agents believe that, as time goes by, the dominant currency, which is also the reference currency of the EMS (the German Mark), will appreciate. We concluded, on the contrary, that the weaker currencies were the ones that with the passing of time appreciated in real terms. The fact that PPP theory was applied to two southern European countries deserves a special mention, because it may serve as an example for other countries that come to be in a position similar to that of Portugal and Spain before their adhered to the European Union.06/2005;
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ABSTRACT: In einer Währungsunion sind Inflationsdifferenzen zwischen den Mitgliedsländern gleichbedeutend mit Veränderungen des realen Wechselkurses. Dies mag erklären, warum in jüngerer Vergangenheit die Inflationsdifferenzen innerhalb der Europäischen Währungsunion verstärkte Aufmerksamkeit in der akademischen Literatur gefunden haben. Der vorliegende Beitrag unternimmt eine Bestandsaufnahme der diesbezüglichen Diskussion. Nach einer kurzen Darstellung der Fakten wird gezeigt, dass die traditionellen Argumente ?Preiskonvergenz? und ?Balassa-Samuelson-Effekt? die beobachteten Inflationsunterschiede nicht hinreichend erklären können. Anhand eines neu-keynesianischen Makromodells werden strukturelle Unterschiede in den beteiligten Volkswirtschaften als Ursache für die Inflationsdifferenzen erläutert. Im Einzelnen sind dies länderspezifische Schocks in der Güternachfrage, die asymmetrische Wirkungsweise der Euro/Dollar-Entwicklung und die asymmetrische Wirkungsweise der einheitlichen Geldpolitik.10/2004;