Inflation Differentials in EU New Member States: An Empirical Evidence

17 Pages Posted: 7 Dec 2008

See all articles by Roman Horvath

Roman Horvath

Charles University in Prague; IOS Regensburg; Université de Nice Sophia Antipolis - Groupe de Recherche en Droit, Economie et Gestion (GREDEG); University of Saint Etienne - Analysis Group and Economic Theory Lyon St-Etienne (GATE-LSE)

Kamila Koprnicka

Czech National Bank (CNB); Charles University in Prague - Institute of Economic Studies

Date Written: October 4, 2008

Abstract

In this paper, we 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. Our main results are as follows. Exchange rate appreciation and higher price level in the new EU members is associated with narrower inflation differential vis-a-vis the euro area, while fiscal deficit and positive output gap seem to contribute to higher inflation differential. Nevertheless, the effect of price convergence on inflation differentials is found to be dominating in these countries suggesting that a country with price level 20% below the euro area average is likely to exhibit inflation nearly one percentage point above the euro area. Overall, our 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.

Keywords: inflation differentials, price convergence, exchange rate, New EU members, panel

JEL Classification: E31, F41

Suggested Citation

Horvath, Roman and Koprnicka, Kamila, Inflation Differentials in EU New Member States: An Empirical Evidence (October 4, 2008). William Davidson Institute Working Paper No. 937, Available at SSRN: https://ssrn.com/abstract=1311529 or http://dx.doi.org/10.2139/ssrn.1311529

Roman Horvath (Contact Author)

Charles University in Prague ( email )

Celetná 13
Praha 1, 116 36
Czech Republic

IOS Regensburg

Landshuter Str. 4
Regensburg, 93047
Germany

Université de Nice Sophia Antipolis - Groupe de Recherche en Droit, Economie et Gestion (GREDEG)

250, rue Albert Einstein
Valbonne, 06560
France

University of Saint Etienne - Analysis Group and Economic Theory Lyon St-Etienne (GATE-LSE)

Lyon
France

Kamila Koprnicka

Czech National Bank (CNB)

Na Prikope 28
CZ-11503 Praha 1
Czech Republic

Charles University in Prague - Institute of Economic Studies

Celetná 13
Praha 1, 116 36
Czech Republic

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