On The Determinants Of Relative Prices: Some Evidence From The Euro Area

Abstract

Within the Balassa-Samuelson framework relative prices are exclusively driven by productivity gaps. The paper at hand suggests that sectoral taxation effects should additionally be taken into account. Such an enlargement of the classical approach is motivated by theory and confronted with real data for nine members of the Euro Area. We find empirical evidence for this extension indicating that both productivity and taxation should be regarded when changes in prices are analyzed.