Inflation Differentials in EMU: the Spanish case

Fernando Restoy Lozano · Javier Vallés · J. David López Salido

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Monetary Policy and Economic Impact Global Financial Crisis and Policies European Monetary and Fiscal Policies

Abstract

In this paper we present some descriptive evidence and simulation exercises with both an estimated backward looking model and a calibrated general equilibrium forward looking model that allow some light to be shed on the determinants and macroeconomic implications of persistent inflation differentials in Spain within EMU. We show that a demand expansion biased towards consumption of non-tradable goods and real-wage rigidities -such as wage indexation clauses- are among the key determinants of diverging price developments in Spain. Moreover, we find that in those conditions the stabilising mechanism of terms of trade effects is relatively weak, although the economy undergoes lasting losses in competitiveness.

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References

1964The Purchasing-Power Parity Doctrine: A Reappraisal 1964Theoretical Notes on Trade Problems 2000Optimal monetary policy with staggered wage and price contracts 2000Summary Indicators of Product Market Regulation with an Extension to Employment Protection Legislation 1999New Directions for Stochastic Open Economy Models 2003Optimal monetary policy in a currency area 1993International Business Cycles: Theory and Evidence 2002Markups, Gaps, and the Welfare Costs of Business Fluctuations

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2006The Real Effects of European Monetary Union 2006Ireland in EMU: more shocks, less insulation?2014Can We Prevent Boom-Bust Cycles During Euro Area Accession?2013A real business cycle model with tradable and non-tradable goods for the Spanish economy 2008The relevance of supply shocks for inflation: the spanish case

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