nr 010 - EMU Enlargement, Inflation and Adjustment of Tradable Goods Prices: What to Expect?
- DNB Working Papers
-
Date 3 September 2004
Inflation differentials resulting from EMU enlargement have so far
mostly been discussed within the Balassa-Samuelson framework, i.e.
resulting from inflation in nontradable goods. We analyse the
inflationary consequences of convergence of tradable goods’ prices.
Using disaggregated price level data, simulations show that
inflation in the new EU member states might on average be 1.5-3.5
percentage points higher than in the current euro area (with
considerable variation between the new EU members). These
inflationary effects even exceed most simulations of the
Balassa-Samuelson effect. The ‘burden of adjustment’ rests mainly
on the shoulders of the new EU members if the European Central Bank
sets monetary policy in response to inflation developments in the
entire currency area. In contrast the impact of EMU enlargement on
the current euro area is limited, due to the small economic weight
of the new EU member states. Keywords: Price level differences,
convergence, EMU enlargement, JEL codes: E30, E31, E50, F40