Productivity differentials and external balance in ERM II

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dc.contributor Bank of Finland Henriksson, Marketta 2014-09-29T09:55:30Z 2015-01-29T09:55:30Z 2005
dc.identifier.isbn 952-462-203-3
dc.identifier.issn 1456-6184
dc.description.abstract Differences in growth, productivity and inflation levels are going to be a prominent feature of the future of EMU, as the convergence process is still on-going in the new Member States. This convergence process can be described by the Balassa-Samuelson proposition, which states that faster growth in the traded goods sector than in the non-traded goods sector results in a rise in the price of non-traded goods and an appreciation of the trend real exchange rate. In this study, the aim is to construct a small open economy model that enables examination of the effects of Balassa-Samuelson-type growth in an intertemporal fixed exchange rate framework with a focus on the external balance. To address the well-known problems with small open economy models, an endogenous discount rate is used. The results imply that faster productivity growth in the traded than in the non-traded goods sector may induce external imbalances, leading to increased vulnerability of the economy. However, trade account deficits would appear to be a temporary phenomenon, as this line of development can be reversed by the natural shift in the composition of consumption towards non-traded goods that is characteristic of catch-up economies. In the meantime, fiscal policy plays a key role. Key words: small open economy, Balassa-Samuelson effect, ERM II, external balance JEL classification numbers: F41, F33, F32
dc.format.extent 36
dc.language.iso ENG
dc.relation.ispartofseries Bank of Finland Research Discussion Papers
dc.subject euroalue
dc.subject EMU
dc.subject lähentyminen
dc.subject inflaatio
dc.subject tuottavuus
dc.subject ERM
dc.subject hinnat
dc.subject valuuttakurssit
dc.subject mallit
dc.subject avoin talous
dc.subject talouskasvu
dc.subject uudet EU-maat
dc.title Productivity differentials and external balance in ERM II
dc.type Sarjajulkaisu
dc.identifier.urn URN:NBN:fi:bof-201501291026 Bank of Finland Research Discussion Papers
dc.series.year 2005
dc.series.number 7/2005
dc.series.sortingnumber 0007 2.3.2005

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