Ross, Märten --- "On nominal and real convergence: the case of Estonia" [2003] ELECD 24; in Tumpel-Gugerell, Gertrude; Mooslechner, Peter (eds), "Economic Convergence and Divergence in Europe" (Edward Elgar Publishing, 2003)

Book Title: Economic Convergence and Divergence in Europe

Editor(s): Tumpel-Gugerell, Gertrude; Mooslechner, Peter

Publisher: Edward Elgar Publishing

ISBN (hard cover): 9781843762416

Section: Chapter 18

Section Title: On nominal and real convergence: the case of Estonia

Author(s): Ross, Märten

Number of pages: 11

Extract:

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 develop-
ments and empirical analysis. The later sections stress economic policy con-
siderations 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 relation-
ship in several advanced accession countries during 1993­99, while the
latter estimated it using the sample of non-transition countries in 1999.
These ...