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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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References

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  1. Égert, Balázs & Halpern, László & MacDonald, Ronald, 2004. "Equilibrium Exchange Rates in Transition Economies: Taking Stock of the Issues," CEPR Discussion Papers 4809, C.E.P.R. Discussion Papers.
  2. Fidrmuc, Jarko & Reininger, Thomas & Backé, Peter & Schardax, Franz, 2002. "Price Dynamics in Central and Eastern European EU Accession," Working Papers 61, Oesterreichische Nationalbank (Austrian Central Bank).
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Cited by:
  1. Martina Alexová, 2012. "Inflation drivers in new EU members," Working and Discussion Papers WP 6/2012, Research Department, National Bank of Slovakia.
  2. 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.
  3. Gaetano D’Adamo & Riccardo Rovelli, 2013. "The role of the Exchange Rate Regime in the process of Real and Nominal Convergence," Working Papers 1314, Department of Applied Economics II, Universidad de Valencia.
  4. Jimborean, R., 2011. "The Exchange Rate Pass-Through in the New EU Member States," Working papers 341, Banque de France.

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