Price convergence to the european union - a problem of relative prices

The article analyses the process of price convergence of the Czech economy to the EU. The authors stress, that the problem consists primarily in the convergence of relative prices in the Czech Republic, not in the convergence of average price levels. The authors define a "coefficient of relative price differences" to measure the scale of the relative price convergence problem. They conclude that this coefficient is still much larger in the Czech Republic than even in the least developed countries of the EU. If prices are downward sticky, relative price convergence can come about more easily at a higher inflation rate than is prevailing in advanced EU economies. Using the extreme assumption of downward price rigidity, the authors estimate the "natural" inflation rate in the Czech Republic to be 3 - 6 % on average over the next ten years.

Keywords: monetary policy, inflation targeting, price convergence, relative prices