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Income convergence and inflation in Central and Eastern Europe : does the sun always rise in the East


  • Karsten Staehr



This paper investigates the process of price convergence in the 10 new EU countries from Central and Eastern Europe. The analyses are based on panel data from 1995 to 2008 of the common currency price relative to the EU15 average. The lagged income level exhibit little explanatory power towards relative inflation, while the lagged price level has some explanatory power. In the long term the relative income and price levels are closely correlated implying concurrent nominal and real convergence. Deviations from the long-term relation between price and income levels are gradually closed by changes in relative inflation and GDP growth, but the process of convergence appears to be rather slow. In the short term the capital inflows associated with current account deficits put substantial upward pressure on the relative price inflation, while the Balassa-Samuelson effect appears to be subdued

Suggested Citation

  • Karsten Staehr, 2010. "Income convergence and inflation in Central and Eastern Europe : does the sun always rise in the East," Bank of Estonia Working Papers wp2010-04, Bank of Estonia, revised 22 Mar 2010.
  • Handle: RePEc:eea:boewps:wp2010-04

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    References listed on IDEAS

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    Cited by:

    1. Jaanika Meriküll & Tairi Rõõm, 2015. "One Currency, One Price? Euro Changeover-Related Inflation in Estonia," Journal of Common Market Studies, Wiley Blackwell, vol. 53(4), pages 822-839, July.
    2. Juan Carlos Cuestas & Luis A. Gil-Alana & Karl Taylor, 2012. "Inflation convergence in Central and Eastern Europe with a view to adopting the euro," Working Papers 12-01, Asociación Española de Economía y Finanzas Internacionales.
    3. repec:prg:jnlpep:v:preprint:id:640:p:1-18 is not listed on IDEAS
    4. Jaanika Merikull & Tairi Room, 2014. "One currency, one price? Euro Changeover related inflation in Estonia," Bank of Estonia Working Papers wp2014-7, Bank of Estonia, revised 10 Oct 2014.
    5. Aleksandra Halka & Grzegorz Szafrański, 2014. "What common factors are driving inflation in CEE countries?," EcoMod2014 6977, EcoMod.

    More about this item


    real convergence; nominal convergence; real exchange rate; inflation; transition economies;

    JEL classification:

    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • O57 - Economic Development, Innovation, Technological Change, and Growth - - Economywide Country Studies - - - Comparative Studies of Countries
    • P24 - Economic Systems - - Socialist Systems and Transition Economies - - - National Income, Product, and Expenditure; Money; Inflation

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