The Balassa–Samuelson (B–S) hypothesis suggests that, in catching-up countries, inflation will be comparatively higher, as prices of non-traded goods “catch up” with the growth of productivity in the tradable goods sector; as a result, these countries will experience real appreciation....

Adopting a simple Phillips curve framework, we show that different labour market institutions across EU countries are associated with significant differences in the response of inflation to unemployment and exchange rate shocks. More wage coordination and higher union density flatten the...