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Catching-up and inflation in Europe: Balassa-Samuelson, Engel's Law and other culprits

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  • Égert, Balázs

Abstract

This study analyses the impact of economic catching-up on annual inflation rates in the European Union with a special focus on the new member countries of Central and Eastern Europe. Using an array of estimation methods, we show that the Balassa-Samuelson effect is not an important driver of inflation rates. By contrast, we find that the initial price level and regulated prices strongly affect inflation outcomes in a nonlinear manner and that the extension of Engel's Law may hold during periods of very fast growth. We interpret these results as a sign that price level convergence comes from goods, market and non-market service prices. Furthermore, we find that the Phillips curve flattens with a decline in the inflation rate, that inflation is more persistent and that commodity prices have a stronger effect on inflation in a higher inflation environment.

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Bibliographic Info

Article provided by Elsevier in its journal Economic Systems.

Volume (Year): 35 (2011)
Issue (Month): 2 (June)
Pages: 208-229

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Handle: RePEc:eee:ecosys:v:35:y:2011:i:2:p:208-229

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Keywords: European Union Inflation Balassa-Samuelson Real convergence Catching up Bayesian model average Non-linearity;

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  1. Peter Backé & Jarko Fidrmuc & Thomas Reininger & Franz Schardax, 2002. "Price Dynamics in Central and Eastern European EU Accession," Working Papers 61, Oesterreichische Nationalbank (Austrian Central Bank).
  2. Balázs Égert, & László Halpern & Ronald MacDonald, 2005. "Equilibrium Exchange Rates in Transition Economies: Taking Stock of the Issues," William Davidson Institute Working Papers Series wp793, William Davidson Institute at the University of Michigan.
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Cited by:
  1. Fidrmuc, Jarko & Klein, Caroline & Price, Robert & Wörgötter, Andreas, 2013. "Slovakia: A Catching Up Euro Area Member In and Out of the Crisis," IZA Policy Papers 55, Institute for the Study of Labor (IZA).
  2. D'Adamo, Gaetano & Rovelli, Riccardo, 2013. "The Role of the Exchange Rate Regime in the Process of Real and Nominal Convergence," IZA Discussion Papers 7627, Institute for the Study of Labor (IZA).
  3. Mirjana Miletic, 2012. "Estimating the Impact of the Balassa-Samuelson Effect in Central and Eastern European Countries: A Revised Analysis of Panel Data Cointegration Tests," Working papers 22, National Bank of Serbia.
  4. Jimborean, R., 2011. "The Exchange Rate Pass-Through in the New EU Member States," Working papers 341, Banque de France.
  5. Martina Alexová, 2012. "Inflation drivers in new EU members," Working and Discussion Papers WP 6/2012, Research Department, National Bank of Slovakia.
  6. D'Adamo, Gaetano & Rovelli, Riccardo, 2013. "Labor Market Institutions and the Response of Inflation to Macro Shocks in the EU: A Two-Sector Analysis," IZA Discussion Papers 7616, Institute for the Study of Labor (IZA).

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