EMU enlargement and convergence of price levels: Lessons from the German reunification

Philipp Maier () and Paul Cavelaars
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Paul Cavelaars: De Nederlandsche Bank

Macroeconomics from EconWPA

Abstract: We analyse the possible impact of EMU enlargement on inflation rates in the accession countries. Using a simple theoretical model we show that the optimal path price adjustments should be asymmetric, i.e. occuring mostly in the candidate countries. Using data from the German reunification we examine how price level convergence could come about. These findings are applied to the enlargement EMU: 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 likely to be small, albeit not negligible. Our results support the need to allow some flexibility in the exchange rate arrangements with the candidate countries facilitate gradual price level convergence prior to EMU enlargement.

Keywords: EMU enlargement; accession countries; inflation; ECB; euro area; Germany; reunification (search for similar items in EconPapers)
JEL-codes: E50 E58 E40 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-cba, nep-eec, nep-ifn and nep-mac
Date: Written 2003-06-23
Note: Type of Document - PDF file; prepared on Windows
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http://129.3.20.41/eps/mac/papers/0306/0306016.pdf (application/pdf)

Related works:
Working Paper: EMU enlargement and convergence of pricelevels: Lessons from the German reunification (2003)
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