Growth and inflation dispersions in EMU: reasons, the role of adjustment channels, and policy implications, Issues 2007-2167
This paper's analysis of growth and inflation dispersions in the euro area reveals several findings. First, these dispersions have declined appreciably since EMU; remaining dispersions are small but persistent, relating mainly to country-specific shocks, not differences in the transmission of common shocks. Second, the different behavior of interest rates just before and after the introduction of the euro has contributed significantly to growth dispersions. However, this has been a one-off shock whose effects, particularly on construction, should be declining over time. Third, financial sector integration could do much more to insure countries against shocks and increase consumption smoothing.
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19 Source adjustment process Aggregate demand business cycles common shocks Contribution of Country-specific country model/the lagged country-specific shocks current period euro EMU and EMU EMU In percent EMU Pre-EMU Figure equations equilibrium house prices equilibrium interest rate estimation results euro area average Euro Area Banks euro area growth/inflation euro area model euro area output euro-area countries euro-area members exchange rate gap fiscal policy GNP/consumption growth and inflation house price gap IMF Staff calculations impulse response functions income and price income smoothing inflation and growth inflation dispersions interest rate gap logarithm of real member country monetary policy nominal interest rate panel regression percent of growth percent of inflation percentage points period euro area Phillips curve Potential output price level convergence private consumption growth real equilibrium exchange real equilibrium house real equilibrium interest real exchange rate real house prices real interest rate role Shocks to Inflation Total Assets variables volatility