Inflation Differentials in EU New Member States: An Empirical Evidence
AbstractIn this paper, we examine the determinants of inflation differentials in a panel of the new European Union member states vis-à-vis the euro area in 1997-2007. Our main results are as follows. Exchange rate appreciation and higher price level in the new EU members is associated with narrower inflation differential vis-à-vis the euro area, while fiscal deficit and positive output gap seem to contribute to higher inflation differential. Nevertheless, the effect of price convergence on inflation differentials is found to be dominating in these countries suggesting that a country with price level 20% below the euro area average is likely to exhibit inflation nearly one percentage point above the euro area. Overall, our results indicate that real convergence factors rather than cyclical variation are more important for inflation developments in the new EU members, as compared to the euro area.
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Bibliographic InfoPaper provided by Charles University Prague, Faculty of Social Sciences, Institute of Economic Studies in its series Working Papers IES with number 2008/24.
Date of creation: Oct 2008
Date of revision: Oct 2008
inflation differentials; price convergence; exchange rate; New EU members; panel data;
Other versions of this item:
- Roman Horvath & Kamila Koprnicka, 2008. "Inflation Differentials in EU New Member States: An Empirical Evidence," William Davidson Institute Working Papers Series wp937, William Davidson Institute at the University of Michigan.
- E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
- F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics
This paper has been announced in the following NEP Reports:
- NEP-ALL-2008-10-07 (All new papers)
- NEP-CBA-2008-10-07 (Central Banking)
- NEP-EEC-2008-10-07 (European Economics)
- NEP-MAC-2008-10-07 (Macroeconomics)
- NEP-MON-2008-10-07 (Monetary Economics)
- NEP-OPM-2008-10-07 (Open Economy Macroeconomics)
- NEP-TRA-2008-10-07 (Transition Economics)
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