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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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    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. 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.
    8. Filippo Altissimo & Pierpaolo Benigno & Diego Rodriguez Palenzuela, 2005. "Long-Run Determinants of Inflation Differentials in a Monetary Union," NBER Working Papers 11473, National Bureau of Economic Research, Inc.
    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. 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.
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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. Nagayasu, Jun, 2011. "Heterogeneity and convergence of regional inflation (prices)," Journal of Macroeconomics, Elsevier, vol. 33(4), pages 711-723.
    3. 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.

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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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