Growth and Regional Development in an Enlarged European Union
Edited by Gertrude Tumpel-Gugerell and Peter Mooslechner
Chapter 18: On nominal and real convergence: the case of Estonia
Märten Ross 18.1. INTRODUCTION1 This chapter discusses some theoretical and practical aspects of real and nominal convergence in the light of Estonia’s accession to the European Union. The ﬁrst part gives an overview of the latest numerical developments and empirical analysis. The later sections stress economic policy considerations and future challenges. To what extent does real convergence inﬂuence nominal convergence? It is a well-established fact that the income and price level of a given country are positively related. Nominal convergence is explained by diﬀerent rates of productivity growth in the open and the sheltered sectors of the economy, by changes in consumer preferences as real incomes rise and to a certain extent by the improvement in the terms of trade as the value-added component of export production augments. The resulting increase in the price of non-tradables over the price of tradables puts gradual upward pressure on the overall price-level. Therefore real (income-level) and nominal (price-level) convergence are closely related. In order to balance nominal and real convergence one has to know the quantitative relationship between changes in the income and the price level. Among several studies, IMF (2000) and De Broeck and Slok (2001) have recently estimated this relationship. The ﬁrst study analysed this relationship in several advanced accession countries during 1993–99, while the latter estimated it using the sample of non-transition countries in 1999. These studies found that a 1 per cent increase in income levels will induce an increase in price levels on the...
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