Inflation Differentials in EMU: the Spanish case
- Restoy Lozano, Fernando
- Vallés, Javier
- López Salido, J. David
ISSN: 0026-959X
Year of publication: 2005
Issue: 220
Pages: 55-104
Type: Article
More publications in: Moneda y crédito
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.