Inflation Differentials between Spain and the EMU: A DSGE Perspective

Pau Rabanal

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

Abstract

This paper estimates a dynamic stochastic general equilibrium model of a currency union with nominal rigidities to explain the sources of inflation differentials between the Economic Monetary Union (EMU) and one of its member countries, Spain. The paper finds that productivity shocks account for 85% of the variability of the inflation differential. Demand shocks explain a large fraction of output growth volatility but not variability in inflation differentials. In addition, the estimated model finds evidence that inflation dynamics are different across countries in the nontradable sector only. Finally, the Balassa–Samuelson effect does not appear to be an important driver of the inflation differential during the EMU period.

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References

1983Staggered prices in a utility-maximizing framework 1996Staggered Prices in a Utility-Maximizing Framework 2003An Estimated Dynamic Stochastic General Equilibrium Model of the Euro Area 1964The Purchasing-Power Parity Doctrine: A Reappraisal 1964Theoretical Notes on Trade Problems 1988Production, growth and business cycles 2007Bayesian Analysis of DSGE Models 2002Can Sticky Price Models Generate Volatile and Persistent Real Exchange Rates?

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2013On Currency Misalignments within the Euro Area 2010Spain in the Euro: A General Equilibrium Analysis 2015Financial Fragility in Small Open Economies: Firm Balance Sheets and the Sectoral Structure 2012Determinants of Inflation in the Euro Area 2015Is it really more dispersed?2010Inflation Differentials in the Euro Area: A Survey 2016

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