Euro-Area Inflation: does the Balassa–Samuelson effect matter?

Abstract

Inflation target, Balassa–Samuelson effect, Monetary policy, Euro Area,

The Contribution of Sectoral Productivity Differentials to Inflation in Greece

“…zero or positive inflation rates. This suggests a BS effect which is large and is in sharp contrast to Lommatzsch and Tober (2006) who find that Greek inflation should be below the 2% rate assumed for the euro area as a whole. This latter result is again based on labour productivity growth differentials, but covers the later period 1995-2004.…”

“…Data periods focus on the 1970s, 1980s and into the 1990s. The results suggest inflation differentials of 2 percentage points (Alberola-Ila and Tyrvainen 1998), 2.5 percentage points (Canzoneri et al 2002;Lommatzsch and Tober 2006) and, even, 4 percentage points (Sinn and Reutter 2001). Empirical work on the Greek economy is hard to come by, mainly, we suspect, because sectoral national accounts data are not readily available on a consistent basis over a long time period.…”

“…9 A second approach estimates the real exchange rate as a function of relative productivities between the two sectors (Faria and Leon-Ledesma 2000;De Broek and Slok 2001;Fischer 2002) or simply the level of economic development Rault 2003, 2005). 10 A third approach focuses on inflation differentials in the euro area (Alberola-Ila and Tyrvainen 1998; Sinn and Reutter 2001;Canzoneri et al 2002;Lommatzsch and Tober 2006). To the extent that euro area countries experience different BS effects, so inflation differentials between them can be justified.…”

Assessing Equilibrium Exchange Rates in CEE Acceding Countries: Can we have DEER with BEER without FEER?

“…The main problem with this approach is that it assumes that the catching-up economies used in the two estimated equations -Ireland, Portugal, Spain and Greece -had higher dual productivity growth rates than countries with higher GDP per capita, which in turn explains the higher inflation rates. However, with the exception of Ireland, the changes in dual productivity in those countries were in fact below the EU average during the 1990s (Lommatzsch and Tober, 2003). 26 Therefore, higher inflation rates cannot be linked to larger increases in dual productivity levels for these countries, which strongly mitigates the paper's results.…”

Equilibrium Exchange Rates in Transition Economies: Taking Stock of the Issues

“…44 This is in contrast with the long held view, advocated by Buiter and Grafe (2002) and Szapáry (2003) among others, that new EU member states in Central and Eastern Europe would not be able to fulfill the Maastricht criterion on price stability because of the B-S effect. New view (low estimates) Burgess et al (2003) Lommatzsch and Tober (2003) and Égert et al (2003) put the size of the B-S effect to 0% (1990 to 1996), to 0.1% (1995)(1996)(1997)(1998)(1999)(2000)(2001)(2002) and to 0.55% (1995)(1996)(1997)(1998)(1999)(2000), respectively.) EE=Estnia, LV=Latvia, LT=Lithuania, CZ=Czech Republic, HU=Hungary, PL=Poland, SK=Slovakia, SI=Slovenia, BG=Bulgaria, HR=Croatia, RO=Romania, RU=Russia, UA=Ukraine.…”