Working Paper: CEPR ID: DP1417
Authors: Matthew B. Canzoneri; Behzad Diba; Gwen Eudey
Abstract: While overall inflation has fallen dramatically in countries like Italy and Spain, inflation in the home good sector remains stubbornly higher than inflation in the traded good sector. If nominal exchange rates are fixed, these real appreciations imply an inflation differential with countries like Germany. We first show that the real appreciations can be explained largely by differences in productivity trends across the traded and non-traded goods sectors. We then analyse the implications of the trends in productivity for the consistency of the Maastricht convergence criteria, and we discuss the pressure productivity trends put on monetary policy in countries like Italy and Spain to meet the convergence criteria; we also discuss steps that might be taken to change the trends in productivity. Lastly, we calculate the implications of current trends in productivity for the differences in regional inflation under a common currency. Comparisons are made with regional productivity trends in the United States.
Keywords: inflation; productivity; Maastricht Treaty
JEL Codes: E31; E58; F02; F11
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Higher productivity growth in the traded goods sector (O49) | Lower production costs (D24) |
| Lower production costs (D24) | Real exchange rates (F31) |
| Real exchange rates (F31) | Inflation differentials (E31) |
| Productivity trends in the traded and non-traded goods sectors (O49) | Observed real appreciations (E39) |
| Productivity trends (O49) | Inflation rates (E31) |