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Inflation dynamics and dual inflation in accession countries: a 'New Keynesian' perspective

  • Arratibel, Olga
  • Rodriguez-Palenzuela, Diego
  • Thimann, Christian

This paper examines inflation dynamics in the current EU-accession countries in central and eastern Europe, focusing particularly on the determinants of 'dual inflation', that is, diverging inflation rates for tradable and non-tradable goods. The paper draws on the recently published data for the Harmonized Index of Consumer Prices (HICP) of the Accession countries and, indeed, finds evidence of ' dual inflation' in these economies. To test empirically for underlying determinants, the paper borrows from the recently developed New Phillips curve literature. Overall, domestic factors have systematically a stronger impact upon non-tradable goods inflation whereas international factors have a stronger impact over tradable goods. Furthermore, the results point to the possibly very different effects of exchange rate regimes over tradable and non-tradable goods inflation. On the whole, the findings suggest that the Balassa-Samuelson effect is not a prominent factor behind the current 'experience' of dual inflation in these countries. JEL Classification: E31, E58, F41, P24

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Paper provided by European Central Bank in its series Working Paper Series with number 0132.

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Date of creation: Mar 2002
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Handle: RePEc:ecb:ecbwps:20020132
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  1. Jordi Gali & Mark Gertler, 2000. "Inflation Dynamics: A Structural Econometric Analysis," NBER Working Papers 7551, National Bureau of Economic Research, Inc.
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  11. Mihály András Kovács & András Simon, 1998. "The components of the real exchange rate in Hungary," MNB Working Papers 1998/3, Magyar Nemzeti Bank (the central bank of Hungary).
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  13. Rogoff, Kenneth, 1985. "The Optimal Degree of Commitment to an Intermediate Monetary Target," The Quarterly Journal of Economics, MIT Press, vol. 100(4), pages 1169-89, November.
  14. Sharmini Coorey & Mauro Mecagni & Erik Offerdal, 1996. "Disinflation in Transition Economies; The Role of Relative Price Adjustment," IMF Working Papers 96/138, International Monetary Fund.
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  17. International Monetary Fund, 2000. "Exchange Rate Regimes in Selected Advanced Transition Economies; Coping with Transition, Capital Inflows, and EU Accession," IMF Policy Discussion Papers 00/3, International Monetary Fund.
  18. Jordi Gali & Tommaso Monacelli, 1999. "Optimal Monetary Policy and Exchange Rate Volatility in a Small Open Economy," Boston College Working Papers in Economics 438, Boston College Department of Economics, revised 15 Nov 1999.
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