Abstract

http://ssrn.com/abstract=2020258
 


 



Catching-Up and Inflation in Europe: Balassa-Samuelson, Engel’s Law and Other Culprits


Balázs Égert


Organization for Economic Co-Operation and Development (OECD); CESifo (Center for Economic Studies and Ifo Institute); Université Paris X Nanterre - Department of Economics; William Davidson Institute

March 12, 2012

Economic Systems, Vol. 35, No. 2, 2011

Abstract:     
This study analyses the impact of economic catching-up on annual inflation rates in the European Union with a special focus on the new member countries of Central and Eastern Europe. Using an array of estimation methods, we show that the Balassa-Samuelson effect is not an important driver of inflation rates. By contrast, we find that the initial price level and regulated prices strongly affect inflation outcomes in a nonlinear manner and that the extension of Engel’s Law may hold during periods of very fast growth. We interpret these results as a sign that price level convergence comes from goods, market and non-market service prices. Furthermore, we find that the Phillips curve flattens with a decline in the inflation rate, that inflation is more persistent and that commodity prices have a stronger effect on inflation in a higher inflation environment.

Keywords: European Union, Inflation, Balassa-Samuelson, Real convergence, Catching up, Bayesian model average, Non-linearity

JEL Classification: E43, E50, E52, C22, G21, O52

Accepted Paper Series


Not Available For Download

Date posted: March 12, 2012  

Suggested Citation

Égert, Balázs, Catching-Up and Inflation in Europe: Balassa-Samuelson, Engel’s Law and Other Culprits (March 12, 2012). Economic Systems, Vol. 35, No. 2, 2011. Available at SSRN: http://ssrn.com/abstract=2020258

Contact Information

Balazs Egert (Contact Author)
Organization for Economic Co-Operation and Development (OECD) ( email )
2 rue Andre Pascal
Paris Cedex 16, 75775
France
CESifo (Center for Economic Studies and Ifo Institute)
Poschinger Str. 5
Munich, DE-81679
Germany
University of Paris 10 Nanterre - Department of Economics
Nanterre Cedex, 92001
France
William Davidson Institute
724 E. University Ave.
Wyly Hall
Ann Arbor, MI 48109-1234
United States
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