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Weak domestic demand combined with downward wage pressures have shrunk the country's inflation differential with other euro zone states.
If anything, to judge by the inflation differential with the country's main trading partners, the rand is about 10% too cheap.
Rabanal (2009) concludes that the Balassa Samuelson effect does not appear to be an important driver of the inflation differential Spain-EMU during the EMU period, although a gap in labor productivity between tradable and non-tradable sectors can be noted.
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"I never have seen the I.M.F. publishing a paper on inflation differentials in California, New Hampshire, Texas and Ohio," he said tartly, in a rare departure from his usual tone of studied moderation.
Between 1994 and 2001, its real trade-weighted value (ie, adjusted for inflation differentials) gained 30%, dragged up by a rising dollar.
J.P. Morgan says that, in real trade-weighted terms (ie, adjusted for inflation differentials), the dollar is at its highest since 1985.In this section Last of the first?
Its trade-weighted level, adjusted for inflation differentials, remains well above its average over the past couple of decades (see chart).
The size of these convergence effects on the exchange rate (for inflation targeters) and for inflation differentials (under a fixed exchange rate) is estimated for a variety of different convergence scenarios.
After adjusting for inflation differentials, the dollar's real trade-weighted value against a broad basket of currencies is close to its average level over the past 30 years.
The dollar's real trade-weighted value (a measure of competitiveness, adjusted for inflation differentials) against 55 developed and emerging-market currencies is at a 16-year high (see chart).Until last year, the dollar's vigour could be justified by the strength of America's economy, which had attracted large inflows of capital chasing high returns.
As regards convergence, there exist several strands in the literature covering price level convergence, inflation convergence and inflation differentials.
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