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Catching-up and Inflation in Europe: Balassa-Samuelson, Engel's Law and Other Culprits

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Listed author(s):
  • Balázs Égert

    (OECD)

Abstract

This study analyses the impact of economic catching-up on annual inflation rates in the European Union with a special focus on the new member countries of Central and Eastern Europe. Using an array of estimation methods, we show that the Balassa-Samuelson effect is not an important driver of inflation rates. By contrast, we find that the initial price level and regulated prices strongly affect inflation outcomes in a nonlinear manner and that the extension of Engel’s Law may hold during periods of very fast growth. We interpret these results as a sign that price level convergence comes from goods, market and non-market service prices. Furthermore, we find that the Phillips curve flattens with a decline in the inflation rate, that inflation persistence increases and that commodity prices have a stronger effect on inflation in a higher inflation environment. Rattrapage économique et inflation en Europe : Balassa-Samuelson, la loi d'Engel et d'autres explications Ce papier étudie l’influence du rattrapage économique sur l’inflation annuelle dans l’Union européenne avec un accent particulier sur les nouveaux pays membres de l’Europe central et orientale. Les résultats indiquent que l’effet Balassa-Samuelson n’est pas à même d’expliquer les taux d’inflation différents observés dans les pays étudiés. Par contre, le niveau général des prix et les prix règlementés ont un impact significatif et non-linéaire sur l’inflation et la loi d’Engel peut être vérifiée durant des périodes de forte croissance économique. Ces résultats suggèrent que la convergence des niveaux de prix provient de la convergence des niveaux de prix des biens échangeables, des biens non-échangeables marchands et non-marchands. Nos résultats montrent aussi que la courbe de Phillips devient plate avec des taux d’inflation plus faible et que la persistance de l’inflation augmente et les prix des matières premières ont une influence plus forte sur l’inflation lorsque l’inflation est plus élevée.

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Paper provided by OECD Publishing in its series OECD Economics Department Working Papers with number 792.

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Date of creation: 16 Jul 2010
Handle: RePEc:oec:ecoaaa:792-en
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Keywords: Balassa-Samuelson effect; Bayesian model averaging; catching-up; contracyclique; Engel’s law; European Union; inflation; nonlinearity; pays membre de l'OCDE; politique budgétaire; procyclique; real convergence;

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Find related papers by JEL classification:
  • C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes
  • C33 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Models with Panel Data; Spatio-temporal Models
  • E21 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth
  • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
  • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
  • E50 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - General
  • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
  • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy
  • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
  • H30 - Public Economics - - Fiscal Policies and Behavior of Economic Agents - - - General
  • H60 - Public Economics - - National Budget, Deficit, and Debt - - - General
  • O52 - Economic Development, Innovation, Technological Change, and Growth - - Economywide Country Studies - - - Europe

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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. Hubert Gabrisch, 2015. "Net Capital Flows To And The Real Exchange Rate Of Western Balkan Countries," Economic Annals, Faculty of Economics, University of Belgrade, vol. 60(205), pages 31-52, April – J.
  3. Tomislav Globan & Vladimir Arčabić & Petar Sorić, 2016. "Inflation in New EU Member States: A Domestically or Externally Driven Phenomenon?," Emerging Markets Finance and Trade, Taylor & Francis Journals, vol. 52(1), pages 154-168, January.
  4. Fidrmuc, Jarko & Klein, Caroline & Price, Robert & Wörgötter, Andreas, 2013. "Slovakia: A Catching Up Euro Area Member In and Out of the Crisis," IZA Policy Papers 55, Institute for the Study of Labor (IZA).
  5. Martina Alexová, 2012. "What determines inflation?," International Journal of Monetary Economics and Finance, Inderscience Enterprises Ltd, vol. 5(4), pages 345-369.
  6. Ansgar Belke & Ulrich Haskamp & Gunther Schnabl & Holger Zemanek, 2015. "Beyond Balassa and Samuelson: Real Convergence, Capital Flows, and Competitiveness in Greece," ROME Working Papers 201506, ROME Network.
  7. Mirjana Miletic, 2012. "Estimating the Impact of the Balassa-Samuelson Effect in Central and Eastern European Countries: A Revised Analysis of Panel Data Cointegration Tests," Working papers 22, National Bank of Serbia.
  8. Jarko Fidrmuc & Andreas Wörgötter, 2013. "Slovakia: The Consequences of Joining the Euro Aea before the Crisis for a Small Catching-up Economy," CESifo Forum, Ifo Institute - Leibniz Institute for Economic Research at the University of Munich, vol. 14(1), pages 57-63, 05.
  9. Jimborean, Ramona, 2013. "The exchange rate pass-through in the new EU member states," Economic Systems, Elsevier, vol. 37(2), pages 302-329.
  10. D'Adamo, Gaetano & Rovelli, Riccardo, 2013. "Labor Market Institutions and the Response of Inflation to Macro Shocks in the EU: A Two-Sector Analysis," IZA Discussion Papers 7616, Institute for the Study of Labor (IZA).

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