Catching-up and inflation in Europe: Balassa-Samuelson, Engel’s Law and other Culprits

Balázs Égert

No wp991, William Davidson Institute Working Papers Series from William Davidson Institute at the University of Michigan

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-makret 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.

Keywords: European Union; inflation; Balassa-Samuelson; real convergence; catching up; Bayesian model average; non-linearity. (search for similar items in EconPapers)
JEL-codes: E43 E50 E52 C22 G21 O52 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-cba, nep-eec, nep-eur, nep-mac, nep-mon, nep-opm and nep-tra
Date: 2010-06-01
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http://www.wdi.umich.edu/files/Publications/WorkingPapers/wp991.pdf

Related works:
Journal Article: Catching-up and inflation in Europe: Balassa-Samuelson, Engel's Law and other culprits (2011)
Working Paper: Catching-up and Inflation in Europe: Balassa-Samuelson, Engel's Law and other Culprits (2010)
Working Paper: Catching-up and Inflation in Europe: Balassa-Samuelson, Engel's Law and Other Culprits (2010)
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Persistent link: http://EconPapers.repec.org/RePEc:wdi:papers:2010-991

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