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Title:Catching-up and inflation in Europe: Balassa-Samuelson, Engel's law and other Culprits PDF Logo
Authors:Égert, Balázs
Issue Date:2010
Series/Report no.:CESifo working paper Monetary Policy and International Finance 3110
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 persistant and that commodity prices have a stronger effect on inflation in a higher inflation environment.
Subjects:European Union
inflation
Balassa-Samuelson
real convergence
catching up
Bayesian model average
non-linearity
JEL:E43
E50
E52
C22
G21
O52
Document Type:Working Paper
Appears in Collections:CESifo Working Papers, CESifo Group Munich

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