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Inflation drivers in new EU members

  • Martina Alexová

    ()

    (National Bank of Slovakia, Research Department)

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.

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Paper provided by Research Department, National Bank of Slovakia in its series Working and Discussion Papers with number WP 6/2012.

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Length: 42 pages
Date of creation: Dec 2012
Date of revision:
Handle: RePEc:svk:wpaper:1021
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  1. Balázs Égert, 2010. "Catching-up and Inflation in Europe: Balassa-Samuelson, Engel's Law and Other Culprits," OECD Economics Department Working Papers 792, OECD Publishing.
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  9. Anindya Banerjee & Bill Russell, 2002. "A Markup Model for Forecasting Inflation for the Euro," Dundee Discussion Papers in Economics 129, Economic Studies, University of Dundee.
  10. Binder, Michael & Pesaran, M Hashem, 1999. " Stochastic Growth Models and Their Econometric Implications," Journal of Economic Growth, Springer, vol. 4(2), pages 139-83, June.
  11. Boschi, Melisso & Girardi, Alessandro, 2005. "Does one monetary policy fit all? the determinants of inflation in EMU countries," MPRA Paper 28554, University Library of Munich, Germany.
  12. Brüggemann, Ralf & Lütkepohl, Helmut, 2000. "Lag selection in subset VAR models with an application to a US monetary system," SFB 373 Discussion Papers 2000,37, Humboldt University of Berlin, Interdisciplinary Research Project 373: Quantification and Simulation of Economic Processes.
  13. Lütkepohl, Helmut & Saikkonen, Pentti & Trenkler, Carsten, 2000. "Maximum eigenvalue versus trace tests for the cointegrating rank of a VAR process," SFB 373 Discussion Papers 2000,83, Humboldt University of Berlin, Interdisciplinary Research Project 373: Quantification and Simulation of Economic Processes.
  14. Luis Catão & Marco Terrones, 2003. "Fiscal Deficits and Inflation," IMF Working Papers 03/65, International Monetary Fund.
  15. Binder, M. & Pesaran, M.H., 1996. "Stochastic Growth," Cambridge Working Papers in Economics 9615, Faculty of Economics, University of Cambridge.
  16. Kim, Byung-Yeon, 2001. "Determinants of Inflation in Poland: A Structural Cointegration Approach," BOFIT Discussion Papers 16/2001, Bank of Finland, Institute for Economies in Transition.
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