IDEAS home Printed from https://ideas.repec.org/p/erp/euirsc/p0136.html
   My bibliography  Save this paper

The Inflation Target of the ECB: Does the Balassa-Samuelson Effect Matter?

Author

Listed:
  • Kirsten Lommatzsch
  • Silke Tober

Abstract

This paper argues that the Balassa-Samuelson effect is not of importance for the inflation target of the ECB. First, econometric tests of the Balassa-Samuelson effect suggest that its econometric significance is weak at best. Second, countries in the process of catching up require a real devaluation in the sector of tradable goods to maintain balance-of-payments equilibrium which counters the real appreciation resulting from a relative increase in service prices. It follows that whereas the Balassa-Samuelson effect could, at least in theory, be used to justify an inflation target well above zero, thedifference in productivity growth and thus the difference in the size of the Balassa-Samuelson effect between countries as such cannot.

Suggested Citation

  • Kirsten Lommatzsch & Silke Tober, 2004. "The Inflation Target of the ECB: Does the Balassa-Samuelson Effect Matter?," EUI-RSCAS Working Papers 19, European University Institute (EUI), Robert Schuman Centre of Advanced Studies (RSCAS).
    • Handle: RePEc:erp:euirsc:p0136
    as

    Download full text from publisher

    File URL: http://www.eui.eu/ERPA/RSCAS/../../RSCAS/WP-Texts/04_19.pdf
    File Function: Full text
    Download Restriction: no
    File URL: http://www.eui.eu/ERPA/RSCAS/../../RSCAS/WP-Texts/04_19.pdf
    File Function: Full text
    Download Restriction: no
    ---><---

    References listed on IDEAS

    as
    1. Artis, Michael J & Mizen, Paul & Kontolemis, Zenon, 1998. "Inflation Targeting: What Can the ECB Learn from the Recent Experience of the Bank of England?," Economic Journal, Royal Economic Society, vol. 108(451), pages 1810-1825, November.
    2. Gerlach, Stefan & Svensson, Lars E. O., 2003. "Money and inflation in the euro area: A case for monetary indicators?," Journal of Monetary Economics, Elsevier, vol. 50(8), pages 1649-1672, November.
    3. Svensson, Lars E. O., 1999. "Monetary policy issues for the Eurosystem," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 51(1), pages 79-136, December.
    4. Lars E. O. Svensson, 2001. "Price Stability as a Target for Monetary Policy: Defining and Maintaining Price Stability," Palgrave Macmillan Books, in: Deutsche Bundesbank (ed.), The Monetary Transmission Process, chapter 2, pages 60-111, Palgrave Macmillan.
    5. De Gregorio, Jose & Giovannini, Alberto & Wolf, Holger C., 1994. "International evidence on tradables and nontradables inflation," European Economic Review, Elsevier, vol. 38(6), pages 1225-1244, June.
    6. Jose De Gregorio & Holger C. Wolf, 1994. "Terms of Trade, Productivity, and the Real Exchange Rate," NBER Working Papers 4807, National Bureau of Economic Research, Inc.
    7. Mr. Luca A Ricci & Mr. Ronald MacDonald, 2002. "Purchasing Power Parity and New Trade Theory," IMF Working Papers 2002/032, International Monetary Fund.
    8. John H. Rogers & Gary Clyde Hufbauer & Erika Wada, 2001. "Price Level Convergence and Inflation in Europe," Working Paper Series WP01-1, Peterson Institute for International Economics.
    9. Manfred J. M. Neumann, 1997. "Monetary Targeting in Germany," Palgrave Macmillan Books, in: Iwao Kuroda (ed.), Towards More Effective Monetary Policy, chapter 7, pages 176-210, Palgrave Macmillan.
    10. Mr. Ronald MacDonald & Mr. Luca A Ricci, 2001. "PPP and the Balassa Samuelson Effect: The Role of the Distribution Sector," IMF Working Papers 2001/038, International Monetary Fund.
    11. Lommatzsch, Kirsten & Tober, Silke, 2004. "What is behind the real appreciation of the accession countries' currencies?: An investigation of the PPI-based real exchange rate," Economic Systems, Elsevier, vol. 28(4), pages 383-403, December.
    12. Martin S. Feldstein, 1997. "The Costs and Benefits of Going from Low Inflation to Price Stability," NBER Chapters, in: Reducing Inflation: Motivation and Strategy, pages 123-166, National Bureau of Economic Research, Inc.
    13. Mishkin, Frederic S., 1998. "International Experiences With Different Monetary Policy Regimes," Seminar Papers 648, Stockholm University, Institute for International Economic Studies.
    14. Paul De Grauwe, 2002. "Challenges for Monetary Policy in Euroland," Journal of Common Market Studies, Wiley Blackwell, vol. 40(4), pages 693-718, November.
    15. Issing, Otmar, 1997. "Monetary targeting in Germany: The stability of monetary policy and of the monetary system," Journal of Monetary Economics, Elsevier, vol. 39(1), pages 67-79, June.
    16. Engle, Robert & Granger, Clive, 2015. "Co-integration and error correction: Representation, estimation, and testing," Applied Econometrics, Russian Presidential Academy of National Economy and Public Administration (RANEPA), vol. 39(3), pages 106-135.
    17. International Monetary Fund, 2002. "Monetary and Exchange Rate Policies of the Euro Area: Selected Issues," IMF Staff Country Reports 2002/236, International Monetary Fund.
    18. Matthew Canzoneri & Robert Cumby & Behzad Diba & Gwen Eudey, 1998. "Trends in European Productivity: Implications for Real Exchange Rates, Real Interest Rates and Inflation Differentials," Working Papers 27, Oesterreichische Nationalbank (Austrian Central Bank).
    19. Michael Reutter & Hans-Werner Sinn, 2000. "The Minimum Inflation Rate for Euroland," CESifo Working Paper Series 377, CESifo.
    20. Ben S. Bernanke & Frederic S. Mishkin, 1997. "Inflation Targeting: A New Framework for Monetary Policy?," Journal of Economic Perspectives, American Economic Association, vol. 11(2), pages 97-116, Spring.
    21. Mark A. Wynne & Diego Rodriguez‐Palenzuela, 2004. "Measurement Bias in the HICP: What do we know and What do we need to know?," Journal of Economic Surveys, Wiley Blackwell, vol. 18(1), pages 79-112, February.
    22. Clifford M. Hurvich & Chih‐Ling Tsai, 1993. "A Corrected Akaike Information Criterion For Vector Autoregressive Model Selection," Journal of Time Series Analysis, Wiley Blackwell, vol. 14(3), pages 271-279, May.
    23. repec:bla:reviec:v:9:y:2001:i:2:p:336-42 is not listed on IDEAS
    24. Hoffmann, Johannes, 1998. "Problems of inflation measurement in Germany," Discussion Paper Series 1: Economic Studies 1998,01e, Deutsche Bundesbank.
    25. 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.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Sabine Le Bayon, 2006. "La croissance espagnole est-elle soutenable ?," Post-Print hal-03459160, HAL.
    2. repec:hal:spmain:info:hdl:2441/2822 is not listed on IDEAS
    3. Egert, Balazs, 2005. "Equilibrium exchange rates in South Eastern Europe, Russia, Ukraine and Turkey: Healthy or (Dutch) diseased?," Economic Systems, Elsevier, vol. 29(2), pages 205-241, June.
    4. Ulrich Fritsche & Camille Logeay & Kirsten Lommatzsch & Katja Rietzler & Sabine Stephan & Rudolf Zwiener unter Mitarb. von Cansel Kiziltepe & Christian Proano-Acosta, 2005. "Auswirkungen von länderspezifischen Differenzen in der Lohn-, Preisniveau- und Produktivitätsentwicklung auf Wachstum und Beschäftigung in den Ländern des Euroraums: Endbericht ; Forschungsprojekt im ," DIW Berlin: Politikberatung kompakt, DIW Berlin, German Institute for Economic Research, volume 8, number pbk8, July.
    5. Balazs Egert & Amina Lahrèche-Révil & Kirsten Lommatzsch, 2004. "The Stock-Flow Approach to the Real Exchange Rate of CEE Transition Economies," Working Papers 2004-15, CEPII research center.
    6. Balázs Égert & László Halpern & Ronald MacDonald, 2006. "Equilibrium Exchange Rates in Transition Economies: Taking Stock of the Issues," Journal of Economic Surveys, Wiley Blackwell, vol. 20(2), pages 257-324, April.
    7. Balázs Égert, 2005. "Balassa-Samuelson Meets South Eastern Europe, the CIS and Turkey: A Close Encounter of the Third Kind?," European Journal of Comparative Economics, Cattaneo University (LIUC), vol. 2(2), pages 221-243, December.
    8. repec:spo:wpmain:info:hdl:2441/2822 is not listed on IDEAS
    9. repec:zbw:bofitp:2005_003 is not listed on IDEAS
    10. Egert, Balazs, 2005. "Equilibrium exchange rates in South Eastern Europe, Russia, Ukraine and Turkey: Healthy or (Dutch) diseased?," Economic Systems, Elsevier, vol. 29(2), pages 205-241, June.
    11. repec:onb:oenbfi:y:2004:i:2:b:6 is not listed on IDEAS
    12. Christian Proaño Acosta, 2007. "Inflation Differentials and Business Cycle Fluctuations in the European Monetary Union," IMK Working Paper 05-2007, IMK at the Hans Boeckler Foundation, Macroeconomic Policy Institute.
    13. Sabine Le Bayon, 2006. "La croissance espagnole est-elle soutenable ?," SciencePo Working papers Main hal-03459160, HAL.
    14. Balázs Égert, 2004. "Equilibrium Exchange Rates in Southeastern Europe, Russia, Ukraine and Turkey: Healthy or (Dutch) Diseased?," Focus on European Economic Integration, Oesterreichische Nationalbank (Austrian Central Bank), issue 2, pages 138-181.
    15. repec:rre:publsh:v:36:y:2006:i:3:p:400-426 is not listed on IDEAS

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Kirsten Lommatzsch & Silke Tober, 2006. "Euro-Area Inflation: does the Balassa–Samuelson effect matter?," International Economics and Economic Policy, Springer, vol. 3(2), pages 105-136, November.
    2. Kirsten Lommatzsch & Silke Tober, 2003. "Reform der geldpolitischen Strategie der Europäischen Zentralbank," DIW Wochenbericht, DIW Berlin, German Institute for Economic Research, vol. 70(7), pages 110-117.
    3. Jens R. Clausen & Juergen B. Donges, 2001. "European Monetary Policy: The Ongoing Debate on Conceptual Issues," The World Economy, Wiley Blackwell, vol. 24(10), pages 1309-1326, November.
    4. Gerlach, Stefan & Svensson, Lars E. O., 2003. "Money and inflation in the euro area: A case for monetary indicators?," Journal of Monetary Economics, Elsevier, vol. 50(8), pages 1649-1672, November.
    5. Balázs Égert & László Halpern & Ronald MacDonald, 2006. "Equilibrium Exchange Rates in Transition Economies: Taking Stock of the Issues," Journal of Economic Surveys, Wiley Blackwell, vol. 20(2), pages 257-324, April.
    6. V. Anton Muscatelli & Patrizio Tirelli & Carmine Trecoci, 2002. "Does Institutional Change Really Matter? Inflation Targets, Central Bank Reform and Interest Rate Policy in the OECD Countries," Manchester School, University of Manchester, vol. 70(4), pages 487-527, June.
    7. Lenarčič, Črt & Masten, Igor, 2020. "Is there a Harrod-Balassa-Samuelson effect? New panel data evidence from 28 European countries," MPRA Paper 100647, University Library of Munich, Germany.
    8. José García Solanes & Fernando Torrejón Flores, "undated". "Testing the BalassA-Samuelson hypothesis in two different groups of countries: OECD and Latin America," Working Papers on International Economics and Finance 05-02, FEDEA.
    9. Manuela Nenna, 2001. "Price Level Convergence among Italian Cities: Any Role for the Harrod-Balassa-Samuelson Hypothesis?," Working Papers 64, Sapienza University of Rome, CIDEI.
    10. Paolo PAESANI, 2003. "Will the Monetary Pillar Stay? A Few Lessons from the UK," Economics Working Papers ECO2003/10, European University Institute.
    11. repec:onb:oenbwp:y::i:106:b:1 is not listed on IDEAS
    12. Lars E. O. Svensson, 1999. "Monetary policy issues for the Eurosystem," Proceedings, Federal Reserve Bank of San Francisco.
    13. Apte, Prakash & Sercu, Piet & Uppal, Raman, 2004. "The exchange rate and purchasing power parity: extending the theory and tests," Journal of International Money and Finance, Elsevier, vol. 23(4), pages 553-571, June.
    14. Meixing DAI, 2009. "On the role of money growth targeting under inflation targeting regime," Working Papers of BETA 2009-11, Bureau d'Economie Théorique et Appliquée, UDS, Strasbourg.
    15. Ian Babetskii & Balázs Égert, 2005. "Equilibrium Exchange Rate in the Czech Republic: How Good is the Czech BEER?," Czech Journal of Economics and Finance (Finance a uver), Charles University Prague, Faculty of Social Sciences, vol. 55(5-6), pages 232-252, May.
    16. Sylvia Staudinger, 2000. "Inflation Targeting versus Nominal Income Targeting," CESifo Working Paper Series 301, CESifo.
    17. Hoffmann, Andreas, 2009. "Fear of depression - Asymmetric monetary policy with respect to asset markets," MPRA Paper 17522, University Library of Munich, Germany.
    18. M. Katsimi, 2004. "Inflation divergence in the euro area: the Balassa-Samuelson effect," Applied Economics Letters, Taylor & Francis Journals, vol. 11(5), pages 329-332.
    19. Dai, Meixing, 2007. "The design of a ‘two-pillar’ monetary policy strategy," MPRA Paper 14403, University Library of Munich, Germany, revised Mar 2009.
    20. de Jong, Eelke, 2002. "Why are price stability and statutory independence of central banks negatively correlated? The role of culture," European Journal of Political Economy, Elsevier, vol. 18(4), pages 675-694, November.
    21. Wolfgang Nierhaus & Timo Wollmershäuser, 2016. "ifo Konjunkturumfragen und Konjunkturanalyse: Band II," ifo Forschungsberichte, ifo Institute - Leibniz Institute for Economic Research at the University of Munich, number 72.

    More about this item

    Keywords

    European Central Bank; EMU; international trade;
    All these keywords.

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:erp:euirsc:p0136. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Valerio PAPPALARDO (email available below). General contact details of provider: https://edirc.repec.org/data/rsiueit.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.