Is there Scope for Inflation Differentials in EMU? An Empirical Evaluation of the Balassa-Samuelson Model in EMU Countries

Enrique Alberola and Tymo Tyrväinen

Working Papers from Banco de España

Abstract: The Balassa-Samuelson (BS) model is evaluated in eight of the eleven EMU countries. This model suggests that productivity differentials between traded and non-traded goods sectors generate sectoral inflation differentials (dual inflation). Furthermore, differentials in the degree of dual inflation induce inflation differentials between countries. The standard BS model implies a cointegration relationship between ralative prices and sectoral productivities. While the link generally seems to exist, the magnitudes of the parameter estimates are not in accordance with the theoretical model in most countries. Since the presumed uniformity of sectoral wages is rejected in most cases, relative wages are allowed to enter the estimation. This extended BS model is endorsed by the data in every country.

Keywords: INFLATION; MONETARY UNION; EUROPE (search for similar items in EconPapers)
JEL-codes: E31 F15 (search for similar items in EconPapers)
Pages: 58 pages
Date: 1998
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Citations: View citations in EconPapers (37)

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Working Paper: Is there scope for inflation differentials in EMU? An empirical evaluation of the Balassa-Samuelson model in EMU countries (1998)
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Persistent link: https://EconPapers.repec.org/RePEc:bde:wpaper:9823

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