Output Divergence in Fixed Exchange Rate Regimes: Is the Euro Area Growing Apart?
Yao Chen and
Additional contact information
Felix Ward: Erasmus University Rotterdam
No 22-031/VI, Tinbergen Institute Discussion Papers from Tinbergen Institute
Can fixed exchange rate regimes cause output divergence among member states? We show that such divergence is a long-run equilibrium characteristic of a two-region model with fixed exchange rates, heterogeneous labor markets, and endogenous growth. Under flexible exchange rates, monetary policy closes output gaps and realizes the associated maximum TFP growth in both regions. Upon fixing exchange rates, the region with higher structural wage inflation falls into a low-growth trap. When calibrated to the euro area, the model implies a slowdown in the TFP growth rate of the euro areaÕs periphery relative to its core. An empirical analysis confirms that the peripheryÕs higher structural wage inflation rate contributed to its lower TFP growth in the aftermath of joining the euro.
Keywords: Exchange rate; growth; monetary policy (search for similar items in EconPapers)
JEL-codes: E50 F31 O40 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-cba, nep-eec, nep-fdg, nep-mac, nep-mon and nep-opm
References: View references in EconPapers View complete reference list from CitEc
Citations: Track citations by RSS feed
Downloads: (external link)
This item may be available elsewhere in EconPapers: Search for items with the same title.
Export reference: BibTeX
RIS (EndNote, ProCite, RefMan)
Persistent link: https://EconPapers.repec.org/RePEc:tin:wpaper:20220031
Access Statistics for this paper
More papers in Tinbergen Institute Discussion Papers from Tinbergen Institute Contact information at EDIRC.
Bibliographic data for series maintained by Tinbergen Office +31 (0)10-4088900 ().