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Digital Library

of the European Council for Modelling and Simulation

 

Title:

A Fair Solution Or Pure Theory: Price Adjustment In The EMU

Authors:

Eszter Boros

Published in:

 

 

(2019). ECMS 2019 Proceedings Edited by: Mauro Iacono, Francesco Palmieri, Marco Gribaudo, Massimo Ficco, European Council for Modeling and Simulation.

 

DOI: http://doi.org/10.7148/2019

 

ISSN: 2522-2422 (ONLINE)

ISSN: 2522-2414 (PRINT)

ISSN: 2522-2430 (CD-ROM)

 

33rd International ECMS Conference on Modelling and Simulation, Caserta, Italy, June 11th – June 14th, 2019

 

 

Citation format:

Eszter Boros (2019). A Fair Solution Or Pure Theory: Price Adjustment In The EMU, ECMS 2019 Proceedings Edited by: Mauro Iacono, Francesco Palmieri, Marco Gribaudo, Massimo Ficco European Council for Modeling and Simulation. doi: 10.7148/2019-0057

DOI:

https://doi.org/10.7148/2019-0057

Abstract:

The expected results of price adjustment have been lying at the core of recent internal devaluation policies in Europe’s Economic and Monetary Union (EMU), and stretch back to the questions of common monetary policy. Price changes have been presented in the literature as an important channel of adjustment of asymmetric developments, making common monetary policy more sustainable. However, price flexibility and its effects cannot be taken for granted in reality. Thus, this paper aims to empirically investigate the size of price changes and their effects on intra-area trade in the EMU after 2010. Notably, we examine two questions. The first is to what extent export prices and domestic prices have adjusted in member states. The second question is whether the observed price changes have sparked recovery via increased market shares of exports and import substitution in the crisis countries. This is investigated by applying decomposition equations to separate these “true” trade outcomes as a starting point. According to our findings, mild effects are partly in connection with the necessity of relying on slowly adjusting prices in the common currency framework. It is therefore advisable to place even greater emphasis on other risk mitigation mechanisms that underpin the viability of the euro.

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