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Inflation Differentials in New EU Member States: Empirical Evidence

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Abstract

In this paper, the authors examine the determinants of inflation differentials in a panel of the new European Union member states vis-a-vis the euro area in 1997–2007. Their main results are as follows. Exchange rate appreciation and a higher price level in the new EU members is associated with a narrower inflation differential vis-a-vis the euro area, while a fiscal deficit and a positive output gap seem to contribute to a higher inflation differential. Nevertheless, the effect of price convergence on inflation differentials is found to be dominant in these countries, suggesting that a country with a price level 20 % below the euro area average is likely to exhibit inflation nearly one percentage point above that in the euro area. Overall, the authors´ results indicate that real convergence factors rather than cyclical variation are more important for inflation developments in the new EU members as compared to the euro area.

Suggested Citation

  • Roman Horváth & Kamila Koprnická, 2008. "Inflation Differentials in New EU Member States: Empirical Evidence," Czech Journal of Economics and Finance (Finance a uver), Charles University Prague, Faculty of Social Sciences, vol. 58(07-08), pages 318-328, Oktober.
    • Handle: RePEc:fau:fauart:v:58:y:2008:i:7-8:p:318-328
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    References listed on IDEAS

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    1. Balázs Egert, 2007. "Real Convergence, Price Level Convergence and Inflation Differentials in Europe," CESifo Working Paper Series 2127, CESifo.
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    5. Emil STAVREV, 2006. "Driving Forces of Inflation in New EU Countries (in English)," Czech Journal of Economics and Finance (Finance a uver), Charles University Prague, Faculty of Social Sciences, vol. 56(5-6), pages 246-257, May.
    6. Angeloni Ignazio & Ehrmann Michael, 2007. "Euro Area Inflation Differentials," The B.E. Journal of Macroeconomics, De Gruyter, vol. 7(1), pages 1-36, August.
    7. N/A, 2007. "Real Convergence, Price Level Convergence and Inflation in Europe," Bruegel Working Papers 267, Bruegel.
    8. Altissimo, Filippo & Benigno, Pierpaolo & Rodriguez Palenzuela, Diego, 2005. "Long-Run Determinants of Inflation Differentials in a Monetary Union," CEPR Discussion Papers 5149, C.E.P.R. Discussion Papers.
    9. Hofmann, Boris & Remsperger, Hermann, 2005. "Inflation differentials among the Euro area countries: Potential causes and consequences," Journal of Asian Economics, Elsevier, vol. 16(3), pages 403-419, June.
    10. Martin Cihak & Tomas Holub, 2005. "Price Convergence in EU-Accession Countries: Evidence from the International Comparison," Economie Internationale, CEPII research center, issue 102, pages 59-82.
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    Cited by:

    1. Nagayasu, Jun, 2010. "Regional Inflation (Price) Behaviors: Heterogeneity and Convergence," MPRA Paper 25430, University Library of Munich, Germany.
    2. Václav Žďárek, 2009. "Challenges for the new EU member states on the road to the Eurozone," International Economics and Economic Policy, Springer, vol. 6(2), pages 157-177, July.
    3. Nagayasu, Jun, 2011. "Heterogeneity and convergence of regional inflation (prices)," Journal of Macroeconomics, Elsevier, vol. 33(4), pages 711-723.

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    More about this item

    Keywords

    inflation differentials; price convergence; exchange rate; new EU members; panel data;
    All these keywords.

    JEL classification:

    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics

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