A Robust Search for Determinants of Price Convergence in European Union – Known “Suspects” or New “Villains”?

The article sheds some light on the problem of determinants of comparative price levels in the EU. A thorough search for determinants is carried out with help of the Bayesian approach (Bayesian model averaging). This state-of-the-art econometric approach allows researchers to deal with problems such as model uncertainty and open-endedness. Consequently, these cause problems with empirical modelling when using ‘classical’ approaches (e.g. cross-sectional estimations). We utilize dataset consisting of a broad range of variables both already utilized in empirical studies and new ones associated with broadly defined institutional environment and covering the period 1997–2011 for EU-26. Our benchmark results confirm the importance of some ‘traditional’ determinants such as labour costs and output gap and broadly defined environment (institutional factors) including a monetary regime. An extension of the basic model so that a potentially differentiated impact of determinants in old and new EU member states can be accommodated does not provide sufficient evidence for differentiated effects of individual price level determinants in new and old EU member states.