Catch-up inflation and nominal convergence: The balancing act for new EU entrants

The paper addresses some of the macroeconomic implications of the simultaneous pursuit of the goals of nominal and real convergence in the presence of a fast and sustained catch-up process. It is argued that when pursued simultaneously, nominal and real convergence may give rise to conflicting policy targets for the new EU members and acceding countries. The reason is that a fast catch-up process within a rigid macroeconomic framework is very likely to be accompanied by catch-up inflation, which is an equilibrium feature of this process. The paper proposes a simple accounting framework which is used to simulate the likely range of the expected catch-up inflation in the new EU members and acceding countries and discusses some of the related policy implications.