Odysseas Katsaitis, Ph.D., Economics, American College of Greece, 6 Gravias St, Aghia Paraskevi, 153 42, Greece and D. Doulos, Ph.D., Ecomomics, American College of Greece, 6 Gravias St, Aghia Paraskevi, 153 42, Greece.
IAES Submission for IAES Conference in Rome
Inflation Dynamics in the Euro Area
D. Doulos and O. Katsaitis
The American College of Greece
katsa@acgmail.gr
Persistent current account (CA) deficits have been a common problem for developed countries during the floating exchange rates period after the end of the Bretton Woods system. This has also been the case for some of the EU-15 countries with the problem being more serious for those in the South. Excessive private and to a certain extent, government spending has been cited as a major cause of these deficits. Lack of fiscal discipline and euphoria from the prospect of the euro-zone participation as well as historically low interest rates resulted in excessive consumer spending. Furthermore, nominal wage adjustments, in excess of productivity growth, have resulted in significant deviations in ULC growth rates between EU-15 countries. The problem seems to be more serious in Greece, Spain, Portugal and, to some extent, in Ireland. Even though inflations divergences are not so large, they are persistent, resulting in continuous losses in competitiveness and real exchange rate appreciation and ever increasing trade and current account deficits for these countries. The purpose of this paper is to investigate what determines inflation divergence and consequently real effective exchange rate appreciation and loss in competitiveness for some of the euro countries.
JEL classification numbers:
E30, F15