IDEAS home Printed from https://ideas.repec.org/p/imk/wpaper/7-2009.html
   My bibliography  Save this paper

Adjustment in EMU: Is Convergence Assured?

Author

Listed:
  • Sebastian Dullien

    (HTW Berlin, University of Applied Sciences, Germany)

  • Ulrich Fritsche

    (University Hamburg, Germany)

  • Ingrid Groessl

    (University Hamburg, Germany)

  • Michael Paetz

    (University Hamburg, Germany)

Abstract

Using a modified version of the model presented by Belke and Gros (2007), we analyze the stability of adjustment in a currency union. Using econometric estimates for parameter values we check the stability conditions for the 11 original EMU countries and Greece. We found significant instability in the model for a large number of countries. We then simulate the adjustment process for some empirically observed parameter values and find that even for countries with relatively smooth adjustment, the adjustment to a price shock in EMU might take several decades. Keywords: EMU, convergence, stability.

Suggested Citation

  • Sebastian Dullien & Ulrich Fritsche & Ingrid Groessl & Michael Paetz, 2009. "Adjustment in EMU: Is Convergence Assured?," IMK Working Paper 07-2009, IMK at the Hans Boeckler Foundation, Macroeconomic Policy Institute.
    • Handle: RePEc:imk:wpaper:7-2009
    as

    Download full text from publisher

    File URL: http://www.boeckler.de/pdf/p_imk_wp_7_2009.pdf
    Download Restriction: no
    ---><---

    Other versions of this item:

    References listed on IDEAS

    as
    1. Ignazio Angeloni & Luc Aucremanne & Michael Ehrmann & Jordi Galí & Andrew Levin & Frank Smets, 2006. "New Evidence on Inflation Persistence and Price Stickiness in the Euro Area: Implications for Macro Modeling," Journal of the European Economic Association, MIT Press, vol. 4(2-3), pages 562-574, 04-05.
    2. Stephen G. Cecchetti & Guy Debelle, 2006. "Has the inflation process changed? [‘Did the underlying behaviour of inflation change in the 1980s? A study of 22 countries,’]," Economic Policy, CEPR, CESifo, Sciences Po;CES;MSH, vol. 21(46), pages 312-352.
    3. Lane, Philip, 2006. "The Real Effects of EMU," CEPR Discussion Papers 5536, C.E.P.R. Discussion Papers.
    4. Luis J. Álvarez & Emmanuel Dhyne & Marco Hoeberichts & Claudia Kwapil & Hervé Le Bihan & Patrick Lünnemann & Fernando Martins & Roberto Sabbatini & Harald Stahl & Philip Vermeulen & Jouko Vilmunen, 2006. "Sticky Prices in the Euro Area: A Summary of New Micro-Evidence," Journal of the European Economic Association, MIT Press, vol. 4(2-3), pages 575-584, 04-05.
    5. Sebastian Dullien & Ulrich Fritsche, 2007. "Anhaltende Divergenz der Lohnstückkostenentwicklung im Euroraum problematisch," DIW Wochenbericht, DIW Berlin, German Institute for Economic Research, vol. 74(22), pages 349-357.
    6. Angeloni Ignazio & Ehrmann Michael, 2007. "Euro Area Inflation Differentials," The B.E. Journal of Macroeconomics, De Gruyter, vol. 7(1), pages 1-36, August.
    7. Ansgar Belke & Daniel Gros, 2007. "Instability of the Eurozone? On Monetary Policy, House Prices and Structural Reforms," Springer Books, in: Richard Tilly & Paul J. J. Welfens & Michael Heise (ed.), 50 Years of EU Economic Dynamics, chapter 0, pages 75-108, Springer.
    8. Belke, Ansgar H. & Gros, Daniel, 2007. "Instability of the Eurozone? On Monetary Policy, House Prices and Labor Market Reforms," IZA Discussion Papers 2547, Institute of Labor Economics (IZA).
    9. Lucas, Robert Jr, 1976. "Econometric policy evaluation: A critique," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 1(1), pages 19-46, January.
    Full references (including those not matched with items 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. Sebastian Dullien & Ulrich Fritsche, 2008. "Does the dispersion of unit labor cost dynamics in the EMU imply long-run divergence?," International Economics and Economic Policy, Springer, vol. 5(3), pages 269-295, November.
    2. Ulrich Fritsche & Vladimir Kuzin, 2007. "Unit labor cost growth differentials in the Euro area, Germany, and the US: lessons from PANIC and cluster analysis," Macroeconomics and Finance Series 200703, University of Hamburg, Department of Socioeconomics.
    3. Sebastian Dullien & Ulrich Fritsche, 2007. "Does the Dispersion of Unit Labor Cost Dynamics in the EMU Imply Long-Run Divergence?: Results from a Comparison with the United States of America and Germany," Discussion Papers of DIW Berlin 674, DIW Berlin, German Institute for Economic Research.
    4. Slanicay Martin, 2014. "Some Notes on Historical, Theoretical, and Empirical Background of DSGE Models," Review of Economic Perspectives, Sciendo, vol. 14(2), pages 145-164, June.
    5. Ulrich Fritsche & Vladimir Kuzin, 2011. "Analysing convergence in Europe using the non-linear single factor model," Empirical Economics, Springer, vol. 41(2), pages 343-369, October.
    6. repec:cnb:ocpubv:as08 is not listed on IDEAS
    7. repec:cnb:ocpubv:as13 is not listed on IDEAS
    8. Michal Franta & Branislav Saxa & Katerina Smidkova, 2007. "Inflation Persistence in New EU Member States: Is It Different Than in the Euro Area Members?," Working Papers 2007/10, Czech National Bank.
    9. Jacques Pelkmans & Lourdes Acedo Montoya & Alessandro Maravalle, 2008. "How product market reforms lubricate shock adjustment in the euro area," European Economy - Economic Papers 2008 - 2015 341, Directorate General Economic and Financial Affairs (DG ECFIN), European Commission.
    10. Jan Babecký & Fabrizio Coricelli & Roman Horváth, 2009. "Assessing Inflation Persistence: Micro Evidence on an Inflation Targeting Economy," Czech Journal of Economics and Finance (Finance a uver), Charles University Prague, Faculty of Social Sciences, vol. 59(2), pages 102-127, June.
    11. Muhammad Farooq Arby & Amjad Ali, 2017. "Threshold Inflation in Pakistan," SBP Research Bulletin, State Bank of Pakistan, Research Department, vol. 13, pages 1-19.
    12. Chengsi Zhang & Joel Clovis, 2009. "Modeling China Inflation Persistence," Annals of Economics and Finance, Society for AEF, vol. 10(1), pages 89-110, May.
    13. Muellbauer, John & Aron, Janine & Sebudde, Rachel, 2015. "Inflation forecasting models for Uganda: is mobile money relevant?," CEPR Discussion Papers 10739, C.E.P.R. Discussion Papers.
    14. Muhammad Nadim Hanif & Muhammad Jahanzeb Malik & Javed Iqbal, 2016. "Intrinsic Inflation Persistence in a Developing Country," SBP Research Bulletin, State Bank of Pakistan, Research Department, vol. 12, pages 19-42.
    15. Migliardo, Carlo, 2012. "Heterogeneity in price setting behavior, spatial disparities and sectoral diversity: Evidence from a panel of Italian firms," Economic Modelling, Elsevier, vol. 29(4), pages 1106-1118.
    16. Eijffinger, Sylvester C. W. & Grajales-Olarte, Anderson & Uras, Burak R., 2020. "Heterogeneity In Wage Setting Behavior In A New-Keynesian Model," Macroeconomic Dynamics, Cambridge University Press, vol. 24(6), pages 1512-1546, September.
    17. Consolo, Agostino & Koester, Gerrit & Nickel, Christiane & Porqueddu, Mario & Smets, Frank, 2021. "The need for an inflation buffer in the ECB’s price stability objective – the role of nominal rigidities and inflation differentials," Occasional Paper Series 279, European Central Bank.
    18. Giannellis, Nikolaos, 2013. "Asymmetric behavior of inflation differentials in the euro area: Evidence from a threshold unit root test," Research in Economics, Elsevier, vol. 67(2), pages 133-144.
    19. repec:cnb:ocpubv:as16 is not listed on IDEAS
    20. Ian Babetskii & Fabrizio Coricelli & Roman Horváth, 2007. "Measuring and Explaining Inflation Persistence: Disaggregate Evidence on the Czech Republic," Working Papers IES 2007/22, Charles University Prague, Faculty of Social Sciences, Institute of Economic Studies, revised Aug 2007.
    21. Fabian Eser & Peter Karadi & Philip R. Lane & Laura Moretti & Chiara Osbat, 2020. "The Phillips Curve at the ECB," Manchester School, University of Manchester, vol. 88(S1), pages 50-85, September.
    22. Daisuke Ikeda & Shinichi Nishioka, 2007. "Price Setting Behavior and Hazard Functions: Evidence from Japanese CPI Micro Data," Bank of Japan Working Paper Series 07-E-19, Bank of Japan.
    23. Lambsdorff, Johann Graf & Schubert, Manuel & Giamattei, Marcus, 2013. "On the role of heuristics—Experimental evidence on inflation dynamics," Journal of Economic Dynamics and Control, Elsevier, vol. 37(6), pages 1213-1229.

    More about this item

    Keywords

    EMU; convergence; stability; inflation;
    All these keywords.

    JEL classification:

    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E61 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Policy Objectives; Policy Designs and Consistency; Policy Coordination
    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models

    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:imk:wpaper:7-2009. 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: Sabine Nemitz (email available below). General contact details of provider: https://edirc.repec.org/data/imkhbde.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.