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Productivity Trends in Europe: Implications for Real Exchange Rates, Real Interest Rates, and Inflation

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  • Matthew Canzoneri
  • Robert Cumby
  • Behzad Diba
  • Gwen Eudey

Abstract

The paper examines a long–run (neoclassical) framework in which differences in productivity growth across sectors and countries lead to inflation differentials. In a currency union, these inflation differentials imply cross–country differentials in real interest rates. The authors estimate the likely size of these differentials for European Union countries, discuss the potential costs of persistent inflation differentials, and comment on the conflicts they may cause within Economic and Monetary Union (EMU). The analytical framework is a variant of the Balassa–Samuelson “productivity hypotheisis,” which relates sectoral productivity trends to trends in the relative price of home goods.

Suggested Citation

  • Matthew Canzoneri & Robert Cumby & Behzad Diba & Gwen Eudey, 2002. "Productivity Trends in Europe: Implications for Real Exchange Rates, Real Interest Rates, and Inflation," Review of International Economics, Wiley Blackwell, vol. 10(3), pages 497-516, August.
    • Handle: RePEc:bla:reviec:v:10:y:2002:i:3:p:497-516
    DOI: 10.1111/1467-9396.00346
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