A European Disease? Non-tradable inflation and real interest rate divergence

Sophie Piton

Working Papers from CEPII research center

Abstract: This paper studies the contribution of real interest rate divergence to the dynamics of the relative price of non-tradables within Europe. Based on a model by De Gregorio et al. (1994), it shows that the real interest rate fall in the Euro Area (EA) periphery following the single currency's inception induced an increase in the relative price of non-tradable goods. Using a new dataset, it documents the dynamics of the tradable and the non-tradable sectors over 1995-2013 and the expansion of the non-tradable sector in the periphery before the euro crisis. It then carries out an econometric estimation for 11 EA countries over 1995-2013 and quantifies the contribution of the pure Balassa-Samuelson effect and the impact of the interest rate on non-tradable relative prices. Diverging evolution in the interest rate impacted greatly the evolution of non-tradable relative prices within the euro area over the period. In Greece, the fall in the real interest rate over 1995-2008 could explain almost half of the non-tradable price increase relative to the EA average, while in Germany the increase in the real interest rate might have contributed up to 7% of the decrease of the non-tradable price relative to the average of the EA.

Keywords: Non-tradable prices; Balassa-Samuelson effect; Real interest rate (search for similar items in EconPapers)
JEL-codes: E43 F41 F45 (search for similar items in EconPapers)
Date: 2016-04
New Economics Papers: this item is included in nep-eec, nep-mac, nep-opm and nep-pke
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (3)

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Related works:
Journal Article: A European Disease? Non-tradable Inflation and Real Interest Rate Divergence (2017)
Working Paper: A European Disease?Non-tradable inflation and real interest rate divergence (2016)
Working Paper: A European Disease?Non-tradable inflation and real interest rate divergence (2016)
Working Paper: A European Disease? Non-tradable inflation and real interest rate divergence (2016)
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Persistent link: https://EconPapers.repec.org/RePEc:cii:cepidt:2016-09

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