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Inflation Differentials in EU New Member States: An Empirical Evidence

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  • Roman Horvath

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  • Kamila Koprnicka

Abstract

In this paper, we examine the determinants of inflation differentials in a panel of the newEuropean 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 Info

Paper provided by William Davidson Institute at the University of Michigan in its series William Davidson Institute Working Papers Series with number wp937.

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Length: pages
Date of creation: 01 Oct 2008
Date of revision:
Handle: RePEc:wdi:papers:2008-937

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Keywords: inflation differentials; price convergence; exchange rate; New EU members; panel data;

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References

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  1. Altissimo, Filippo & Benigno, Pierpaolo & Rodriguez Palenzuela, Diego, 2005. "Long-Run Determinants of Inflation Differentials in a Monetary Union," CEPR Discussion Papers, C.E.P.R. Discussion Papers 5149, C.E.P.R. Discussion Papers.
  2. Ashoka Mody & Franziska Ohnsorge, 2007. "Can Domestic Policies Influence Inflation?," IMF Working Papers 07/257, International Monetary Fund.
  3. Hofmann, Boris & Remsperger, Hermann, 2005. "Inflation differentials among the Euro area countries: Potential causes and consequences," Journal of Asian Economics, Elsevier, Elsevier, vol. 16(3), pages 403-419, June.
  4. Patrick Honohan & Philip R. Lane, 2003. "Divergent inflation rates in EMU," Economic Policy, CEPR;CES;MSH, CEPR;CES;MSH, vol. 18(37), pages 357-394, October.
  5. Balázs Égert, & László Halpern & Ronald MacDonald, 2005. "Equilibrium Exchange Rates in Transition Economies: Taking Stock of the Issues," William Davidson Institute Working Papers Series, William Davidson Institute at the University of Michigan wp793, William Davidson Institute at the University of Michigan.
  6. Balázs Égert, 2008. "Prices and Price Convergence in Emerging Europe: an Overview," National Institute Economic Review, National Institute of Economic and Social Research, National Institute of Economic and Social Research, vol. 204(1), pages 66-84, April.
  7. Fidrmuc, Jarko & Korhonen, Iikka, 2006. "Meta-analysis of the business cycle correlation between the euro area and the CEECs," Journal of Comparative Economics, Elsevier, vol. 34(3), pages 518-537, September.
  8. Balázs �gert, 2007. "Real Convergence, Price Level Convergence and Inflation in Europe," Working Papers, Bruegel 267, Bruegel.
  9. Angeloni, Ignazio & Ehrmann, Michael, 2004. "Euro area inflation differentials," Working Paper Series, European Central Bank 0388, European Central Bank.
  10. Balázs Égert, 2007. "Real Convergence, Price Level Convergence and Inflation Differentials in Europe," Working Papers, Oesterreichische Nationalbank (Austrian Central Bank) 138, Oesterreichische Nationalbank (Austrian Central Bank).
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Cited by:
  1. Balogun, Emmanuel Dele, 2009. "Inflation differential in the West African Monetary Zone (WAMZ) area:Implications for unionization," MPRA Paper 13045, University Library of Munich, Germany.
  2. Balogun, Emmanuel Dele, 2008. "An alternative reconsideration of macroeconomic convergence criteria for West African Monetary Zone," MPRA Paper 11367, University Library of Munich, Germany.
  3. Nagayasu, Jun, 2010. "Regional Inflation (Price) Behaviors: Heterogeneity and Convergence," MPRA Paper 25430, University Library of Munich, Germany.

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