The Enlargement of EMU: differences in relative inflation

Description

The project was carried out by Lukasz Rawdanowicz under a Global Development Network regional research grant program. The project investigated the structural determinants of relative prices (non-tradables vs. tradables) in the context of inflation differentials in the EU. The analysis was based on the theoretical model developed by Bergstrand (1991). This framework incorporates three alternative hypotheses of relative inflation (Harrod-Ballasa-Samuelson, relative factor endowment, and demand effects). In general, econometric estimations provided the support for the Bergstrand model and corroborate the findings of other studies that relative labor productivity and demand factors are important for the determination of relative prices. The final paper from the research delivered to the GDN in May 2005 discusses policy implications for overall inflation stemming from relative price models. Publication of the paper in a refereed journal is planned for the first quarter of 2006.

Sponsor:

GDN Regional Research Competition, CERGE-EI