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Inflation in the New EU Countries from Central and Eastern Europe : Theories and panel data estimations

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  • Karsten Staehr

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Abstract

This paper seeks to identify factors driving consumer price inflation in the new EU member countries from Central and Eastern Europe. Different theories are discussed, including some of particular importance to economies experiencing high economic growth and rapid structural change. The explanatory power of the theories is tested using panel data estimations based on annual data from 1997 to 2007. Convergence- related factors, including the Balassa-Samuelson and the Bhagwati capital-deepening effects, are important drivers of inflation. Import inflation and, by implication, exchange rate developments have an important impact, while the exchange rate regime is unimportant. Higher government debt and larger revenues are associated with higher inflation. The cyclical position as measured by unemployment, employment changes or the current account balance is found to affect inflation. Food price shocks have large but short-lived effects, while energy price shocks have longer-lasting effects on the inflation rate. Multicollinearity across the explanatory variables makes it difficult to identify the effect of each individual factor

Suggested Citation

  • Karsten Staehr, 2010. "Inflation in the New EU Countries from Central and Eastern Europe : Theories and panel data estimations," Bank of Estonia Working Papers wp2010-06, Bank of Estonia, revised 26 May 2010.
  • Handle: RePEc:eea:boewps:wp2010-06
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    File URL: http://www.eestipank.ee/sites/eestipank.ee/files/publication/en/WorkingPapers/2010/_wp_610.pdf
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    References listed on IDEAS

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    1. Lein, Sarah M. & León-Ledesma, Miguel A. & Nerlich, Carolin, 2008. "How is real convergence driving nominal convergence in the new EU Member States?," Journal of International Money and Finance, Elsevier, vol. 27(2), pages 227-248, March.
    2. Paul De Grauwe & Gunther Schnabl, 2008. "Exchange Rate Stability, Inflation, and Growth in (South) Eastern and Central Europe," Review of Development Economics, Wiley Blackwell, vol. 12(3), pages 530-549, August.
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    Cited by:

    1. Novák, Zsuzsanna, 2014. "Monetáris politika, infláció és gazdasági növekedés Kelet-Közép- és Délkelet-Európában
      [Monetary policy, inflation and economic growth in Central and South Eastern Europe]
      ," Közgazdasági Szemle (Economic Review - monthly of the Hungarian Academy of Sciences), Közgazdasági Szemle Alapítvány (Economic Review Foundation), vol. 0(7), pages 923-942.
    2. Arkady Gevorkyan & Willi Semmler, 2016. "Macroeconomic variables and the sovereign risk premia in EMU, non-EMU EU, and developed countries," Empirica, Springer;Austrian Institute for Economic Research;Austrian Economic Association, vol. 43(1), pages 1-35, February.
    3. Czudaj, Robert, 2011. "P-star in times of crisis - Forecasting inflation for the euro area," Economic Systems, Elsevier, vol. 35(3), pages 390-407, September.
    4. Arkady Gevorkyan & Willi Semmler, 2016. "Macroeconomic variables and the sovereign risk premia in EMU, non-EMU EU, and developed countries," Empirica, Springer;Austrian Institute for Economic Research;Austrian Economic Association, vol. 43(1), pages 1-35, February.

    More about this item

    Keywords

    inflation; inflation theories; real and nominal convergence; inflation determinants;

    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
    • E63 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Comparative or Joint Analysis of Fiscal and Monetary Policy; Stabilization; Treasury Policy
    • P24 - Economic Systems - - Socialist Systems and Transition Economies - - - National Income, Product, and Expenditure; Money; Inflation

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