Real Convergence in the Enlarged Euro Area: A Coming Challenge for Monetary Policy

Abstract

Economic and monetary union (EMU) implies the acceleration of an ongoing process of real convergence, whereby worker productivity, income and price levels tend to equalise across the euro area. Over the next 10?30 years, as real convergence takes place, trend inflation will be higher in poorer countries and lower in richer ones. When the accession countries in Central and Eastern Europe join the EMU, these structural differences in inflation rates among euro area countries will present the European Central Bank with new challenges in maintaining price stability. Three benchmark estimates for speed of real convergence are derived using data from Europe, the United States and Canada, respectively.

Keywords: Real convergence, Euro area, trend inflation, EU accession

JEL Classification: E58, O49