The Inflation Target of the ECB: Does the Balassa-Samuelson Effect Matter?

Kirsten Lommatzsch () and Silke Tober

No 19, EUI-RSCAS Working Papers from European University Institute (EUI), Robert Schuman Centre of Advanced Studies (RSCAS)

Abstract: This paper argues that the Balassa-Samuelson effect is not of importance for the inflation target of the ECB. First, econometric tests of the Balassa-Samuelson effect suggest that its econometric significance is weak at best. Second, countries in the process of catching up require a real devaluation in the sector of tradable goods to maintain balance-of-payments equilibrium which counters the real appreciation resulting from a relative increase in service prices. It follows that whereas the Balassa-Samuelson effect could, at least in theory, be used to justify an inflation target well above zero, thedifference in productivity growth and thus the difference in the size of the Balassa-Samuelson effect between countries as such cannot.

Keywords: European Central Bank; EMU; international trade (search for similar items in EconPapers)
Date: 2004-10-15
New Economics Papers: this item is included in nep-cba, nep-eec, nep-ifn, nep-mac and nep-mon
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (14)

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