Inflation Dynamics and Dual Inflation in Accession Countries: A 'New Keynesian' Perspective

48 Pages Posted: 14 Jan 2003

See all articles by Olga Arratibel

Olga Arratibel

European Central Bank (ECB)

Diego Rodriguez-Palenzuela

European Central Bank (ECB)

Christian Thimann

AXA Group

Date Written: March 2002

Abstract

This paper examines inflation dynamics in the current EU-accession countries in central and eastern Europe, focusing particularly on the determinants of "dual inflation", that is, diverging inflation rates for tradable and non-tradable goods. The paper draws on the recently published data for the Harmonised Index of Consumer Prices (HICP) of the accession countries and, indeed, finds evidence of "dual inflation" in these economies. To test empirically for underlying determinants, the paper borrows from the recently developed New Phillips curve literature. Overall, domestic factors have systematically a stronger impact upon non-tradable goods inflation whereas international factors have a stronger impact over tradable goods inflation. Furthermore, the results point to the possibly very different effects of exchange rate regimes over tradable and non-tradable goods inflation. On the whole, the findings suggest that the Balassa-Samuelson effect is not a prominent factor behind the current experience of "dual inflation" in these countries.

Keywords: Dual Inflation, Central and Eastern European Countries, Balassa-Samuelson Effect, New Keynesian Phillips Curve, Exchange Rate Regimes

JEL Classification: E31, E58, F41, P24

Suggested Citation

Arratibel, Olga and Rodriguez-Palenzuela, Diego and Thimann, Christian, Inflation Dynamics and Dual Inflation in Accession Countries: A 'New Keynesian' Perspective (March 2002). Available at SSRN: https://ssrn.com/abstract=357345

Olga Arratibel (Contact Author)

European Central Bank (ECB) ( email )

Eurotower
Kaiserstrasse 29
D-60311 Frankfurt am Main
Germany
0049 69 13440 (Phone)
0044 69 1344 6000 (Fax)

Diego Rodriguez-Palenzuela

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany
(49) 69-1344-6480 (Phone)
(49) 69-1344-6575 (Fax) (Fax)

Christian Thimann

AXA Group ( email )

25 avenue Matignon
Paris, 75008
France

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