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- Title
A European Disease? Non-tradable Inflation and Real Interest Rate Divergence.
- Authors
Piton, Sophie
- Abstract
This article studies the contribution of real interest rate divergence to the dynamics of the relative price of non-tradables within Europe. Extending the traditional Balassa-Samueslon effect, it shows that the real interest rate fall in the Euro area (EA) periphery following the single currency's inception induced an increase in the relative price of non-tradable goods. Using a new data set, it documents the dynamics of the tradable and the non-tradable sectors over 1995-2013 and the expansion of the non-tradable sector in the periphery before the crisis. It then carries out an econometric estimation for 11 EA countries over 1995-2013 and quantifies the contribution of the pure Balassa-Samuelson effect and the impact of the interest rate on non-tradable relative prices. Diverging evolution in the interest rate impacted greatly the evolution of non-tradable relative prices within the EA over the period. In Greece, the fall in the real interest rate over 1995-2008 could explain almost half of the non-tradable price increase relative to the EA average, while in Germany the increase in the real interest rate might have contributed up to 7% of the decrease of the non-tradable price relative to the average of the EA.
- Subjects
EUROPE; PRICE inflation; NONTRADED goods; INTEREST rates; BALASSA-Samuelson effect; ECONOMETRIC models
- Publication
CESifo Economic Studies, 2017, Vol 63, Issue 2, p210
- ISSN
1610-241X
- Publication type
Article
- DOI
10.1093/cesifo/ifw018