IDEAS home Printed from https://ideas.repec.org/a/eee/riibaf/v19y2005i2p281-303.html
   My bibliography  Save this article

Inflation dynamics and nominal adjustment in the Baltic States

Author

Listed:
  • Masso, Jaan
  • Staehr, Karsten

Abstract

The paper seeks to explain the inflationary dynamics in the Baltic countries since the mid-1990s. While single-equation estimations generally yield poor results, panel data estimations provide statistically and economically satisfactory findings. Our main result is that the observed gradual disinflation can to a large extent be explained by adjustment to international prices. Stringent fixed exchange rate systems have exerted downward pressure on inflation both directly and via expectations of future inflation. Measures of excess capacity in the labour market have no effect on inflation, while industrial output gaps have some explanatory power. Real oil price shocks have an immediate but short-lived impact on inflation.
(This abstract was borrowed from another version of this item.)

Suggested Citation

  • Masso, Jaan & Staehr, Karsten, 2005. "Inflation dynamics and nominal adjustment in the Baltic States," Research in International Business and Finance, Elsevier, vol. 19(2), pages 281-303, June.
  • Handle: RePEc:eee:riibaf:v:19:y:2005:i:2:p:281-303
    as

    Download full text from publisher

    File URL: http://www.sciencedirect.com/science/article/pii/S0275-5319(05)00016-4
    Download Restriction: Full text for ScienceDirect subscribers only
    ---><---

    As the access to this document is restricted, you may want to look for a different version below or search for a different version of it.

    Other versions of this item:

    References listed on IDEAS

    as
    1. Stanley Fischer & Ratna Sahay & Carlos A. Végh, 2002. "Modern Hyper- and High Inflations," Journal of Economic Literature, American Economic Association, vol. 40(3), pages 837-880, September.
    2. Fuhrer, Jeffrey C, 1997. "The (Un)Importance of Forward-Looking Behavior in Price Specifications," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 29(3), pages 338-350, August.
    3. Dave Turner & Elena Seghezza, 1999. "Testing for a Common OECD Phillips Curve," OECD Economics Department Working Papers 219, OECD Publishing.
    4. Raul Eamets & Urmas Varblane & Kaja Sostra, 2003. "External Macroeconomic Shocks and the Estonian economy: How did the Russian Financial Crisis affect Estonian Unemployment and Foreign Trade?," Baltic Journal of Economics, Baltic International Centre for Economic Policy Studies, vol. 3(2), pages 5-24, July.
    5. Mark Gertler & Jordi Gali & Richard Clarida, 1999. "The Science of Monetary Policy: A New Keynesian Perspective," Journal of Economic Literature, American Economic Association, vol. 37(4), pages 1661-1707, December.
    6. repec:zbw:bofitp:2001_007 is not listed on IDEAS
    7. International Monetary Fund, 2002. "Lithuania: History and Future of the Currency Board Arrangement," IMF Working Papers 2002/127, International Monetary Fund.
    8. Im, Kyung So & Pesaran, M. Hashem & Shin, Yongcheol, 2003. "Testing for unit roots in heterogeneous panels," Journal of Econometrics, Elsevier, vol. 115(1), pages 53-74, July.
    9. Mr. Andres Sutt & Mr. Basil B. Zavoiceo & Mr. Adalbert Knöbl, 2002. "The Estonian Currency Board: Its Introduction and Role in the Early Success of Estonia's Transition to a Market Economy," IMF Working Papers 2002/096, International Monetary Fund.
    10. Nauro F. Campos & Abrizio Coricelli, 2002. "Growth in Transition: What We Know, What We Don't, and What We Should," Journal of Economic Literature, American Economic Association, vol. 40(3), pages 793-836, September.
    11. Mr. Thierry Pujol & Mr. Mark E Griffiths, 1996. "Moderate Inflation in Poland: A Real Story," IMF Working Papers 1996/057, International Monetary Fund.
    12. International Monetary Fund, 2001. "Interpreting Real Exchange Rate Movements in Transition Countries," IMF Working Papers 2001/056, International Monetary Fund.
    13. Maddala, G S & Wu, Shaowen, 1999. "A Comparative Study of Unit Root Tests with Panel Data and a New Simple Test," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 61(0), pages 631-652, Special I.
    14. DiNardo, J. & Moore, M.P., 1999. "The Phillips Curve is Back? Using Panel Data to Analyze the Relationship Between Unemployment and Inflation in an Open Economy," Papers 99-00-04, California Irvine - School of Social Sciences.
    15. Martins Bitans & Dace Slakota & Ivars Tillers, 2001. "Price Dynamics in Latvia - Experience and Future Prospects," Working Papers 2001/01, Latvijas Banka.
    16. Davidson, Russell & MacKinnon, James G., 1993. "Estimation and Inference in Econometrics," OUP Catalogue, Oxford University Press, number 9780195060119.
    17. Marianne Baxter & Robert G. King, 1999. "Measuring Business Cycles: Approximate Band-Pass Filters For Economic Time Series," The Review of Economics and Statistics, MIT Press, vol. 81(4), pages 575-593, November.
    18. repec:zbw:bofitp:2001_017 is not listed on IDEAS
    19. Mark Gertler & Jordi Gali & Richard Clarida, 1999. "The Science of Monetary Policy: A New Keynesian Perspective," Journal of Economic Literature, American Economic Association, vol. 37(4), pages 1661-1707, December.
    20. Marit Hinnosaar, 2001. "Potential output estimates for Central and East European countries using production function method," Bank of Estonia Working Papers 2001-2, Bank of Estonia, revised 13 Oct 2001.
    21. Kaddour Hadri, 2000. "Testing for stationarity in heterogeneous panel data," Econometrics Journal, Royal Economic Society, vol. 3(2), pages 148-161.
    22. Jörg Rahn, 2003. "Bilateral Equilibrium Exchange Rates of the EU Accession Countries against the Euro," Quantitative Macroeconomics Working Papers 20306, Hamburg University, Department of Economics.
    23. Eamets, Raul & Masso, Jaan, 2004. "Labour Market Flexibility and Employment Protection Regulation in the Baltic States," IZA Discussion Papers 1147, Institute of Labor Economics (IZA).
    24. Mr. Stanley Fischer & Ms. Ratna Sahay & Mr. Carlos A. Végh Gramont, 2002. "Modern Hyper- and High Inflations," IMF Working Papers 2002/197, International Monetary Fund.
    25. Falcetti, Elisabetta & Raiser, Martin & Sanfey, Peter, 2002. "Defying the Odds: Initial Conditions, Reforms, and Growth in the First Decade of Transition," Journal of Comparative Economics, Elsevier, vol. 30(2), pages 229-250, June.
    26. de Haan, Jakob & Berger, Helge & van Fraassen, Erik, 2001. "How to reduce inflation: an independent central bank or a currency board? The experience of the Baltic countries," Emerging Markets Review, Elsevier, vol. 2(3), pages 218-243, September.
    27. Balázs Égert, 2005. "The Balassa‐Samuelson Hypothesis in Estonia: Oil Shale, Tradable Goods, Regulated Prices and Other Culprits," The World Economy, Wiley Blackwell, vol. 28(2), pages 259-286, February.
    28. Tiiu Paas & Raul Eamets & Jaan Masso & Marit Room, 2003. "Labour Market Flexibility And Migration In The Baltic States: Macro Evidences," University of Tartu - Faculty of Economics and Business Administration Working Paper Series 16, Faculty of Economics and Business Administration, University of Tartu (Estonia).
    29. Maritta Paloviita, 2006. "Inflation Dynamics in the Euro Area and the Role of Expectations," Empirical Economics, Springer, vol. 31(4), pages 847-860, November.
    30. Mr. Vincent Hogan, 1998. "Explaining the Recent Behavior of Inflation and Unemployment in the United States," IMF Working Papers 1998/145, International Monetary Fund.
    31. repec:zbw:bofitp:2003_011 is not listed on IDEAS
    32. Roberto Golinelli & Renzo Orsi, 2002. "Modelling Inflation in EU Accession Countries: The Case of the Czech Republic, Hungary and Poland," Eastward Enlargement of the Euro-zone Working Papers wp09, Free University Berlin, Jean Monnet Centre of Excellence, revised 01 Aug 2002.
    33. Balázs Egert, 2002. "Investigating the Balassa-Samuelson hypothesis in the transition: Do we understand what we see? A panel study," The Economics of Transition, The European Bank for Reconstruction and Development, vol. 10(2), pages 273-309, July.
    34. repec:onb:oenbwp:y::i:61:b:1 is not listed on IDEAS
    35. John Williamson, 1994. "Estimating Equilibrium Exchange Rates," Peterson Institute Press: All Books, Peterson Institute for International Economics, number 17, July.
    36. 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).
    37. repec:zbw:bofitp:2001_016 is not listed on IDEAS
    38. Fabrizio Iacone & Renzo Orsi, 2002. "Exchange Rate Management and Inflation Targeting in the CEE Accession Countries," Eastward Enlargement of the Euro-zone Working Papers wp08, Free University Berlin, Jean Monnet Centre of Excellence, revised 01 Aug 2002.
    39. Rodriguez-Palenzuela, Diego & Thimann, Christian & Backé, Peter, 2002. "Inflation dynamics and dual inflation in accession countries: a 'New Keynesian' perspective," Working Paper Series 132, European Central Bank.
    40. Fabiani, Silvia & Morgan, Julian, 2003. "Aggregation and euro area Phillips curves," Working Paper Series 213, European Central Bank.
    41. repec:zbw:bofrdp:2002_020 is not listed on IDEAS
    42. repec:zbw:bofitp:2002_006 is not listed on IDEAS
    43. Jeffrey C. Fuhrer, 1995. "The Phillips curve is alive and well," New England Economic Review, Federal Reserve Bank of Boston, issue Mar, pages 41-56.
    44. G. S. Maddala & Shaowen Wu, 1999. "A Comparative Study of Unit Root Tests with Panel Data and a New Simple Test," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 61(S1), pages 631-652, November.
    45. Manuel Arellano & Stephen Bond, 1991. "Some Tests of Specification for Panel Data: Monte Carlo Evidence and an Application to Employment Equations," Review of Economic Studies, Oxford University Press, vol. 58(2), pages 277-297.
    46. Elmar B. Koch, 1997. "Exchange Rates and Monetary Policy in Central Europe - a Survey of Some Issues," Working Papers 24, Oesterreichische Nationalbank (Austrian Central Bank).
    47. Alf Vanags, 1998. "Macroeconomic stabilisation and central bank policy in Latvia," Post-Communist Economies, Taylor & Francis Journals, vol. 10(2), pages 203-215.
    48. Balázs Égert, 2002. "Investigating the Balassa‐Samuelson hypothesis in the transition: Do we understand what we see? A panel study," The Economics of Transition, The European Bank for Reconstruction and Development, vol. 10(2), pages 273-309, July.
    49. Levin, Andrew & Lin, Chien-Fu & James Chu, Chia-Shang, 2002. "Unit root tests in panel data: asymptotic and finite-sample properties," Journal of Econometrics, Elsevier, vol. 108(1), pages 1-24, May.
    50. David Dupuis, 2004. "The New Keynesian Hybrid Phillips Curve: An Assessment of Competing Specifications for the United States," Staff Working Papers 04-31, Bank of Canada.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Karsten Staehr, 2008. "The Maastricht Inflation Criterion and the New EU Members from Central and Eastern Europe," Bank of Estonia Working Papers 2008-04, Bank of Estonia, revised 30 Oct 2008.
    2. Fumitaka Furuoka & Qaiser Munir & Hanafiah Harvey, 2013. "Does the Phillips curve exist in the Philippines?," Economics Bulletin, AccessEcon, vol. 33(3), pages 2001-2016.
    3. repec:ebl:ecbull:v:5:y:2007:i:16:p:1-14 is not listed on IDEAS
    4. John Lewis, 2011. "How has the Financial Crisis Affected the Eurozone Accession Outlook in Central and Eastern Europe?," Chapters, in: Wim Meeusen (ed.), The Economic Crisis and European Integration, chapter 11, Edward Elgar Publishing.
    5. Fumitaka Furuoka, 2007. "Does the “Phillips Curve” Really Exist? New Empirical Evidence from Malaysia," Economics Bulletin, AccessEcon, vol. 5(16), pages 1-14.
    6. Mariarosaria Comunale, 2019. "An investigation of the exchange rate pass-through in the Baltic states," CAMA Working Papers 2019-60, Centre for Applied Macroeconomic Analysis, Crawford School of Public Policy, The Australian National University.
    7. Aleksejs Meļihovs & Anna Zasova, 2009. "Assessment of the natural rate of unemployment and capacity utilisation in Latvia," Baltic Journal of Economics, Baltic International Centre for Economic Policy Studies, vol. 9(2), pages 25-46, December.
    8. Borek Vašícek, 2011. "Inflation Dynamics and the New Keynesian Phillips Curve in Four Central European Countries," Emerging Markets Finance and Trade, Taylor & Francis Journals, vol. 47(5), pages 71-100, September.
    9. Ciner, Cetin, 2011. "Commodity prices and inflation: Testing in the frequency domain," Research in International Business and Finance, Elsevier, vol. 25(3), pages 229-237, September.
    10. Mockaitis, Audra I., 2005. "The race to EU integration: How many and how high are the hurdles?," Research in International Business and Finance, Elsevier, vol. 19(2), pages 195-199, June.
    11. Indrė Lapinskaitė & Algita Miečinskienė, 2019. "Assessment of the Impact of Hard Commodity Prices Changes on Inflation in European Union Countries," Central European Business Review, Prague University of Economics and Business, vol. 2019(5), pages 18-35.
    12. Hossein Bastanzad & Pedram Davoudi & Hossein Tavakolian, 2018. "Foreign Exchange Rate Pricing at the Future Contract (Case of I.R. of Iran)," Iranian Economic Review (IER), Faculty of Economics,University of Tehran.Tehran,Iran, vol. 22(1), pages 253-293, Winter.
    13. Rasmus Kattai, 2005. "EMMA - A Quarterly Model of the Estonian Economy," Bank of Estonia Working Papers 2005-12, Bank of Estonia, revised 12 Dec 2005.
    14. Aurelijus Dabušinskas & Dmitry Kulikov, 2007. "New Keynesian Phillips curve for Estonia, Latvia and Lithuania," Bank of Estonia Working Papers 2007-07, Bank of Estonia, revised 26 Aug 2007.
    15. Lena Malesevic-Perovic, 2009. "Cointegration Approach to Analysing Inflation in Croatia," Financial Theory and Practice, Institute of Public Finance, vol. 33(2), pages 201-218.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Herwartz, Helmut & Reimers, Hans-Eggert, 2006. "Modelling the Fisher hypothesis: World wide evidence," Economics Working Papers 2006-04, Christian-Albrechts-University of Kiel, Department of Economics.
    2. Helmut Herwartz & Hans-Eggert Reimers, 2006. "Panel non stationary tests of the Fisher hypothesis in a world wide context. An analysis of 114 economies during the period 1960-2004," Applied Econometrics and International Development, Euro-American Association of Economic Development, vol. 6(3).
    3. Balázs Égert & László Halpern & Ronald MacDonald, 2006. "Equilibrium Exchange Rates in Transition Economies: Taking Stock of the Issues," Journal of Economic Surveys, Wiley Blackwell, vol. 20(2), pages 257-324, April.
    4. Newell, Richard G. & Papps, Kerry L. & Sanchirico, James N., 2005. "Asset Pricing in Created Markets for Fishing Quotas," Discussion Papers 10639, Resources for the Future.
    5. Guglielmo Maria Caporale & Thouraya Hadj Amor & Christophe Rault, 2011. "International financial integration and real exchange rate long-run dynamics in emerging countries: Some panel evidence," The Journal of International Trade & Economic Development, Taylor & Francis Journals, vol. 20(6), pages 789-808, September.
    6. Carlos De Resende, 2007. "Cross-Country Estimates of the Degree of Fiscal Dominance and Central Bank Independence," Staff Working Papers 07-36, Bank of Canada.
    7. Christophe RAULT & Guglielmo Maria CAPORALE & Thouraya HADJ AMOR, 2009. "International Financial Integration And Real Exchange Rate Long-Run Dynamics In Emerging Countries," William Davidson Institute Working Papers Series wp970, William Davidson Institute at the University of Michigan.
    8. repec:onb:oenbwp:y::i:106:b:1 is not listed on IDEAS
    9. José Abraham López Machuca & Jorge Eduardo Mendoza Cota, 2017. "Salarios, desempleo y productividad laboral en la industria manufacturera mexicana. (Wage, Unemployment and Labor Productivity in the Mexican Manufacturing Industry)," Ensayos Revista de Economia, Universidad Autonoma de Nuevo Leon, Facultad de Economia, vol. 0(2), pages 185-228, October.
    10. Polemis, Michail & Fotis, Panagiotis, 2011. "Gasoline price asymmetries in the Euro Zone," MPRA Paper 32755, University Library of Munich, Germany.
    11. Ronald MacDonald & Flávio Vieira, "undated". "A panel data investigation of real exchange rate misalignment and growth," Working Papers 2010_13, Business School - Economics, University of Glasgow.
    12. Snower, Dennis & Karanassou, Marika & Sala, Hector, 2003. "The European Phillips Curve: Does the NAIRU Exist?," CEPR Discussion Papers 4102, C.E.P.R. Discussion Papers.
    13. Ding Nan & Pomi Shahbaz & Shamsheer ul Haq & Muhammad Nadeem & Muhammad Imran, 2023. "The Economies’ Ability to Produce Diversified and Complex Goods to Meet the Global Competition: Role of Gross Value Chain, Institutional Quality, and Human Capital," Sustainability, MDPI, vol. 15(8), pages 1-17, April.
    14. García-Solanes, José & Sancho-Portero, F. Israel & Torrejón-Flores, Fernando, 2008. "Beyond the Balassa-Samuelson effect in some new member states of the European Union," Economic Systems, Elsevier, vol. 32(1), pages 17-32, March.
    15. Ibrahiem, Dalia M. & Hanafy, Shaimaa A., 2021. "Do energy security and environmental quality contribute to renewable energy? The role of trade openness and energy use in North African countries," Renewable Energy, Elsevier, vol. 179(C), pages 667-678.
    16. Gharehgozli, Orkideh, 2021. "An empirical comparison between a regression framework and the Synthetic Control Method," The Quarterly Review of Economics and Finance, Elsevier, vol. 81(C), pages 70-81.
    17. Christos Alexakis & Theophano Patra & Sunil Poshakwale, 2010. "Predictability of stock returns using financial statement information: evidence on semi-strong efficiency of emerging Greek stock market," Applied Financial Economics, Taylor & Francis Journals, vol. 20(16), pages 1321-1326.
    18. Sung, Bongsuk & Song, Woo-Yong & Park, Sang-Do, 2018. "How foreign direct investment affects CO2 emission levels in the Chinese manufacturing industry: Evidence from panel data," Economic Systems, Elsevier, vol. 42(2), pages 320-331.
    19. Dobnik, Frauke, 2011. "Energy Consumption and Economic Growth Revisited: Structural Breaks and Cross-section Dependence," Ruhr Economic Papers 303, RWI - Leibniz-Institut für Wirtschaftsforschung, Ruhr-University Bochum, TU Dortmund University, University of Duisburg-Essen.
    20. Frenkel Michael & Koske Isabell, 2012. "Are the Real Exchange Rates of the New EU Member Countries in Line with Fundamentals? – Implications of the NATREX Approach," Journal of Economics and Statistics (Jahrbuecher fuer Nationaloekonomie und Statistik), De Gruyter, vol. 232(2), pages 129-145, April.
    21. Eberechukwu UNEZE, 2011. "Foreign Aid And The Real Exchange Rate In The West African Economic And Monetary Union (Waemu)," Applied Econometrics and International Development, Euro-American Association of Economic Development, vol. 11(2).

    More about this item

    JEL classification:

    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • E42 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Monetary Sytsems; Standards; Regimes; Government and the Monetary System
    • P24 - Political Economy and Comparative Economic Systems - - Socialist and Transition Economies - - - National Income, Product, and Expenditure; Money; Inflation

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:eee:riibaf:v:19:y:2005:i:2:p:281-303. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Catherine Liu (email available below). General contact details of provider: http://www.elsevier.com/locate/ribaf .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.