Wage, Price, and Unemployment Dynamics and the Convergence to Purchasing Power Parity in the Euro Area

The paper discusses the determination of wages, prices, productivity and unemployment in the Euro-wide area in the post Bretton Woods period. The econometric results provide strong evidence on a regime shift at the start of the EMS and the empirical analysis is done separately for the two regimes. Two variables, measuring different aspects of the convergence towards European purchasing power parity, are shown to be crucial for explaining inflation and unemployment behavior in the more recent regime. The results point to the importance of being on a sustainable ppp level when fixing the exchange rates.