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How is real convergence driving nominal convergence in the new EU Member States?

Sarah Lein, Miguel Leon-Ledesma and Carolin Nerlich

Journal of International Money and Finance, 2008, vol. 27, issue 2, 227-248

Abstract: We evaluate the empirical relevance of real convergence on the process of nominal convergence for the new EU Member States. We focus our discussion on two main channels: productivity growth and increased trade openness. Productivity growth can have a positive effect on price levels via the Balassa-Samuelson effect, whereas increased openness leads to reductions in mark-ups and costs and therefore can have a negative impact on prices. We empirically assess their relevance using a Structural VAR model to which we applied a model reduction algorithm. Our findings show that, in general, openness has had a negative impact and productivity growth a positive one on price level convergence with respect to the euro area.

Date: 2008
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