Demand Shocks and Equilibrium Relative Prices in the Euro Area

Pietro Cova

Rivista di Politica Economica, 2008, vol. 98, issue 1, 89-133

Abstract: This paper develops a two-sector, two-country model with monopolistic competition for a currency area. Within this framework we show that the same relative productivity and price trends suggested by the literature on the Balassa - Samuelson effect can be generated by shifts in expenditure shares that lead the existing capital stock in the currency area to move towards those sectors experiencing a rise in relative demand. Focusing on regional and sectoral inflation differentials across member countries of the European Monetary Union we find support for this demand-side explanation.

JEL-codes: E31 F41 (search for similar items in EconPapers)
Date: 2008
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Citations: View citations in EconPapers (3)

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Persistent link: https://EconPapers.repec.org/RePEc:rpo:ripoec:v:98:y:2008:i:1:p:89-133

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