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Modelling Inflation in EU Accession Countries: The Case of the Czech Republic, Hungary and Poland

Author

Listed:
  • Roberto Golinelli

    () (Department of Economics, University of Bologna (Italy))

  • Renzo Orsi

    () (Department of Economics, University of Bologna (Italy))

Abstract

Inflation in Central and East European countries varied considerably over the transition phase, and econometric relationships between prices, money, wages and exchange rates are said to have been unstable during this period. In order to shed some light on the issue, this paper analyses some empirical models of the inflation process in the three earliest east European transition economies: the Czech Republic, Hungary and Poland. Since the end of the 1980s these economies have experienced high rates of inflation, although significant disinflation measures were introduced during the mid-nineties to enhance these countries’ chances of joining the EU, and they succeeded in getting inflation under control without high costs in terms of lost output. Given this, the determinants of inflation need to be empirically analysed not only in order to understand the disinflation measures, but also to assess the possible effects of future pressure on prices. Price stabilisation is an essential complement to the success of transition. Policies to contain inflation are necessary for transition economies to grow and firms to restructure. In the present paper, we first look at inflation within the context of multivariate cointegration, where domestic and foreign price determinants are initially assessed in separate blocks (each single-theory based) in order to obtain a number of long-term attractors. We then formulate consumer and producer inflation equations from more general VEqCMs for each country. The importance of theory-based imbalances (from previous cointegration experiments) in explaining inflation can be assessed at this stage. Our most significant empirical findings seem to substantiate the idea that many, if not all, theoretical determinants of inflation are of importance in those countries in question: the exchange rate and the output gap would appear to be of particular importance in explaining the phenomenon.

Suggested Citation

  • Roberto Golinelli & Renzo Orsi, 2002. "Modelling Inflation in EU Accession Countries: The Case of the Czech Republic, Hungary and Poland," Eastward Enlargement of the Euro-zone Working Papers wp09, Free University Berlin, Jean Monnet Centre of Excellence, revised 01 Aug 2002.
  • Handle: RePEc:ezo:ezppap:wp09
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    Cited by:

    1. D’Adamo, Gaetano & Rovelli, Riccardo, 2015. "The role of the exchange rate regime in the process of real and nominal convergence," Journal of Macroeconomics, Elsevier, vol. 43(C), pages 21-37.
    2. Égert, Balázs, 2004. "Assessing equilibrium exchange rates in CEE acceding countries : can we have DEER with BEER without FEER? : A critical survey of the literature," BOFIT Discussion Papers 1/2004, Bank of Finland, Institute for Economies in Transition.
    3. Maruška Vizek & Tanja Broz, 2009. "Modeling Inflation in Croatia," Emerging Markets Finance and Trade, Taylor & Francis Journals, vol. 45(6), pages 87-98, November.
    4. Fakhri, Hasanov & Khudayar, Hasanli, 2011. "Why had the Money Market Approach been irrelevant in explaining inflation in Azerbaijan during the rapid economic growth period?," MPRA Paper 29559, University Library of Munich, Germany.
    5. Todorov Ivan Krumov, 2014. "Macroeconomic Trends in the New Member Countries of the European Union Before the Euro Area Debt Crisis," Scientific Annals of Economics and Business, De Gruyter Open, vol. 61(2), pages 197-217, December.
    6. Balázs Égert, 2005. "Balassa-Samuelson Meets South Eastern Europe, the CIS and Turkey: A Close Encounter of the Third Kind?," European Journal of Comparative Economics, Cattaneo University (LIUC), vol. 2(2), pages 221-243, December.
    7. Maruška Vizek & Tanja Broz, 2009. "Modeling Inflation in Croatia," Emerging Markets Finance and Trade, M.E. Sharpe, Inc., vol. 45(6), pages 87-98, November.
    8. Masso, Jaan & Staehr, Karsten, 2005. "Inflation dynamics and nominal adjustment in the Baltic States," Research in International Business and Finance, Elsevier, vol. 19(2), pages 281-303, June.
    9. Fabrizio Iacone & Renzo Orsi, 2002. "Exchange Rate Management and Inflation Targeting in the CEE Accession Countries," Eastward Enlargement of the Euro-zone Working Papers wp08, Free University Berlin, Jean Monnet Centre of Excellence, revised 01 Aug 2002.
    10. Ionuţ Cristian BACIU, 2014. "The Relationship Between Inflation And The Main Macroeconomic Variables In Romania," Network Intelligence Studies, Fundația Română pentru Inteligența Afacerii, Editorial Department, issue 4, pages 161-172, November.

    More about this item

    Keywords

    Inflation modelling; transition economies; European Union enlargement;

    JEL classification:

    • C4 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods: Special Topics
    • E5 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit

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