Trends in European Productivity and Real Exchange Rates.

Inflation has fallen dramatically in countries like Spain and Italy over the last decade, but the rate of increase in "home good" prices remains stubbornly higher than the rate of increase in "traded good" prices. The paper begins by showing that this discrepancy can be explained (at least in part) by trends in productivity; average labour productivity has grown much more slowly in the home good sector in these countries. The paper goes on to investigate the implications of productivity trends for the consistency of the Maastricht convergence criteria an for the differences in nation inflation rates after EMU.