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Inflation drivers in new EU members

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  • Martina Alexová

    () (National Bank of Slovakia, Research Department)

Abstract

This paper focuses on the determinants of inflation for new European Union members during the period from 1996 to 2011. Detecting the drivers of inflation can be essential in designing structural reforms aimed at complementing the main objectives of monetary policy pursued in these countries. We utilize a structural vector error correction model to estimate long run relationships between inflation, mark-up and economic activity incorporating structural factors such as openness of the economy and production and analyse dynamic properties of the models. We find that half of the countries can be characterized by cost-push inflation and the rest by demand side factors. An appropriate monetary strategy to control inflation should accompany ECB monetary strategy in countries belonging to the euro area. The strategy should also maintain a credible currency peg in Lithuania, Latvia and Bulgaria and meet inflation targets in inflation targeting countries in addition with appropriate structural adjustments in labour markets and production capacity.

Suggested Citation

  • Martina Alexová, 2012. "Inflation drivers in new EU members," Working and Discussion Papers WP 6/2012, Research Department, National Bank of Slovakia.
  • Handle: RePEc:svk:wpaper:1021
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    References listed on IDEAS

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    More about this item

    Keywords

    inflation; long run structural VARs; subset VEC model; mark-up; output gap; deficit; and commodity prices;

    JEL classification:

    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes

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