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Inflation persistence: euro area and new EU Member States

Author

Listed:
  • Franta, Michal
  • Saxa, Branislav
  • Šmídková, Kateřina

Abstract

Is inflation persistence in the new EU Member States (NMS) comparable to that in the euro area countries? We argue that persistence may not be as different between the two country groups as one might expect. We confirm that one should work carefully with the usual estimation methods when analyzing the NMS, given the scope of the convergence process they went through. We show that due to frequent breaks in inflation time series in the NMS, parametric statistical measures assuming a constant mean deliver substantially higher persistence estimates for the NMS than for the euro area countries. Employing time-varying mean leads to the reversal of this result and suggests similar or lower inflation persistence for the NMS compared to euro area countries. Structural measures show that backward-looking behavior may be more important component in explaining inflation dynamics in the NMS than in the euro area countries. JEL Classification: E31, C22, C11, C32

Suggested Citation

  • Franta, Michal & Saxa, Branislav & Šmídková, Kateřina, 2007. "Inflation persistence: euro area and new EU Member States," Working Paper Series 810, European Central Bank.
  • Handle: RePEc:ecb:ecbwps:2007810
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    File URL: https://www.ecb.europa.eu//pub/pdf/scpwps/ecbwp810.pdf
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    Keywords

    C11; C22; C32; JEL Classification: E31; Keywords: Inflation persistence; New Hybrid Phillips curve; new Member States; time-varying mean;

    JEL classification:

    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes
    • C11 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Bayesian Analysis: General
    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models

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