Inflation and Productivity Differentials in EMU

  • Paul De Grauwe
  • Frauke Skudelny


The aim of this paper is to find out whether the Balassa-Samuelson effect is important in EMU. We use panel data going from 1971 to 1995 for the current EU members in order to estimate the long run effect of bilateral differences in productivity growth differential between the traded and non-traded goods sector on bilateral inflation differentials. The regression results indicate that there is little evidence for a significant effect of the productivity differential, as proposed by the theory. The productivity growth in the non-traded goods sector alone does however have a significant effect on inflation. According to our regression results, less than one percent of the inflation differentials between EU countries is on average due to the productivity growth in the traded and the non-traded goods sector. However, the impact of productivity shocks was quite substantial, leading to a maximum of 7 percent increase in inflation differentials.


Productivity Growth Real Exchange Rate Consumer Price Index Purchase Power Parity Market Imperfection 
These keywords were added by machine and not by the authors. This process is experimental and the keywords may be updated as the learning algorithm improves.


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Copyright information

© Springer Science+Business Media New York 2002

Authors and Affiliations

  • Paul De Grauwe
    • 1
    • 2
  • Frauke Skudelny
    • 3
  1. 1.Centre of Economic StudiesUniversity of LeuvenBelgium
  2. 2.CEPRBelgium
  3. 3.Centre of Economic StudiesUniversity of LeuvenBelgium

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