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

Listed author(s):
  • Balazs Egert

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

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Date of creation: 2010
Handle: RePEc:ces:ceswps:_3110
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  16. MacDonald, Ronald & Wójcik, Cezary, 2008. "Catching-up and inflation differentials in a heterogeneous monetary union: Some implications for the euro area and new EU Member States," Economic Systems, Elsevier, vol. 32(1), pages 4-16, March.
  17. Dobrinsky, Rumen, 2006. "Catch-up inflation and nominal convergence: The balancing act for new EU entrants," Economic Systems, Elsevier, vol. 30(4), pages 424-442, December.
  18. Bruce E. Hansen, 1997. "Threshold effects in non-dynamic panels: Estimation, testing and inference," Boston College Working Papers in Economics 365, Boston College Department of Economics.
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