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What common factors are driving inflation in CEE countries?

Author

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  • Aleksandra Hałka

    (Narodowy Bank Polski)

  • Grzegorz Szafrański

    (Narodowy Bank Polski and Univeristy of Lodz)

Abstract

In this paper, we analyse the sources of time variation in consumer inflation across ten Central and Eastern European (CEE) countries and five sectors (durables, semidurables, non-durables, food, and services) in the period 2001-2013. With a multi-level factor model we decompose product-level HICP inflation rates into the following components: CEE region wide, sector, country, country-sector, and idiosyncratic. The outcomes indicate that region-wide and country specific components of inflation are more persistent than sector and product-level components, which is in line with similar studies for core EU countries. Two region-wide factors explain about 17% of variance in monthly price changes, whereas the other common components explain below 10% each. The results are at odds with empirical evidence on the importance of sectoral price shocks in developed economies and the volatility-persistence puzzle. This difference may be related to the conclusion that the first region-wide factor is associated with common disinflationary processes that occurred in CEE economies in 2000s, whereas the second one reveals significant correlations with global factors, especially commodity prices and euro area price developments.

Suggested Citation

  • Aleksandra Hałka & Grzegorz Szafrański, 2015. "What common factors are driving inflation in CEE countries?," NBP Working Papers 225, Narodowy Bank Polski, Economic Research Department.
  • Handle: RePEc:nbp:nbpmis:225
    Note: The authors wish to thank the participants of the NBP seminar, 13th EBES Conference, SSEM EuroConference 2014, the Conference on Advances in Applied Macro- Finance and Forecasting in 2014, and AAMFF2014 Conference whose invaluable feedback we benefited from in the course of our research.
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    More about this item

    Keywords

    product-level inflation; CEE economies; multi-level factor model;

    JEL classification:

    • C38 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Classification Methdos; Cluster Analysis; Principal Components; Factor Analysis
    • C55 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Large Data Sets: Modeling and Analysis
    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • F62 - International Economics - - Economic Impacts of Globalization - - - Macroeconomic Impacts

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