I am thankful to Fabrice Collard, Jordi Galí, Michel Juillard, Juan Rubio-Ramírez, Christopher Sims, Jaume Ventura, seminar participants at the European Central Bank, Banque de France, Banco de Portugal, Paris School of Economics, Universitat Pompeu Fabra, the CEPR/Banco de España ESSIM meeting in Tarragona, the editor (Ken West), and two anonymous referees for very helpful comments and suggestions. The views of this paper are those of the author and they should not be attributed to the IMF or IMF policy.
Inflation Differentials between Spain and the EMU: A DSGE Perspective
Article first published online: 10 AUG 2009
© 2009 The Ohio State University
Journal of Money, Credit and Banking
Volume 41, Issue 6, pages 1141–1166, September 2009
How to Cite
RABANAL, P. (2009), Inflation Differentials between Spain and the EMU: A DSGE Perspective. Journal of Money, Credit and Banking, 41: 1141–1166. doi: 10.1111/j.1538-4616.2009.00250.x
- Issue published online: 10 AUG 2009
- Article first published online: 10 AUG 2009
- Received September 27, 2007; and accepted in revised form March 9, 2009.
- Balassa–Samuelson effect;
- Bayesian estimation;
- European Monetary Union
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.