This paper analyses the adjustment mechanism in the euro area prior to the crisis. Results show that the real exchange rate adjusted to redress cyclical divergences and that after monetary unification, real exchange rate dynamics became less reactive to country-specific shocks but also less...

Inflation differentials within European Monetary Union (EMU) are increasingly seen as exerting adverse effects on the price competitiveness of member countries’ firms and given the common monetary policy within EMU as being detrimental to euro-area economies, in particular to those with...