Exchange rate regime shifts and price patterns

In English The financial crisis starting 2008 made many European countries opt for a change of exchange rate regime. The choice of price measure as entry requirement to the European Economic and Monetary Union (EMU) and as input in the monetary policy decision process re-appeared as an important political and research issue. We argue in this paper that considering the importance of producer prices in international competition, their role is underplayed by policy makers and researchers. We analyze producer prices in the transition from national exchange-rate regimes to the EMU. For 13 two-digit manufacturing sectors in the first 11 countries to adopt the euro, we find significant price convergence before (1993-1998), but no or modest evidence of convergence after (1998-05) the euro was introduced. Price patterns are only partly similar to what prior studies have found for consumer prices, and is consistent with the change of exchange rate regime to a monetary union anchoring inflation rates. A conditional β-convergence analysis reveals effective exchange-rate changes as important determinants of price convergence, suggesting that import of inflation is an important determinant of price developments in the EMU. We conclude that focusing monetary policymaking on consumer prices alone appears inefficient. Rather, the idea forwarded in several recent theoretical contributions of increasing the attention paid to producer prices seems warranted.