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Catching-up and Inflation in Europe: Balassa-Samuelson, Engel's Law and other Culprits

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  • Balazs Egert

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 persistant and that commodity prices have a stronger effect on inflation in a higher inflation environment.

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File URL: http://www.cesifo-group.de/portal/page/portal/DocBase_Content/WP/WP-CESifo_Working_Papers/wp-cesifo-2010/wp-cesifo-2010-06/cesifo1_wp3110.pdf
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Bibliographic Info

Paper provided by CESifo Group Munich in its series CESifo Working Paper Series with number 3110.

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Date of creation: 2010
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Handle: RePEc:ces:ceswps:_3110

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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. Balázs Égert & László Halpern & Ronald MacDonald, 2005. "Equilibrium Exchange Rates in T ransition Economies: T aking Stock of the Issues," Working Papers, Oesterreichische Nationalbank (Austrian Central Bank) 106, Oesterreichische Nationalbank (Austrian Central Bank).
  2. Peter Backé & Jarko Fidrmuc & Thomas Reininger & Franz Schardax, 2002. "Price Dynamics in Central and Eastern European EU Accession," Working Papers, Oesterreichische Nationalbank (Austrian Central Bank) 61, Oesterreichische Nationalbank (Austrian Central Bank).
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Cited by:
  1. Gaetano D’Adamo & Riccardo Rovelli, 2013. "The role of the Exchange Rate Regime in the process of Real and Nominal Convergence," Working Papers, Department of Applied Economics II, Universidad de Valencia 1314, Department of Applied Economics II, Universidad de Valencia.
  2. 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, Institute for the Study of Labor (IZA) 55, Institute for the Study of Labor (IZA).
  3. Jimborean, R., 2011. "The Exchange Rate Pass-Through in the New EU Member States," Working papers, Banque de France 341, Banque de France.
  4. Martina Alexová, 2012. "Inflation drivers in new EU members," Working and Discussion Papers, Research Department, National Bank of Slovakia WP 6/2012, Research Department, National Bank of Slovakia.
  5. 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, National Bank of Serbia 22, National Bank of Serbia.
  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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