Inflation in New EU Member States: A Domestically or Externally Driven Phenomenon?

Tomislav Globan, Vladimir Arčabić and Petar Sorić

No 1405, EFZG Working Papers Series from Faculty of Economics and Business, University of Zagreb

Abstract: This paper analyzes the domestic and external inflation determinants for eight non-eurozone new EU member states (NMS). The empirical literature has been rather silent on the comparison of the relative importance of domestic vs. foreign inflation determinants. This paper aims to fill this gap and add to the literature by several methodological and empirical contributions. Empirical analysis is based on the structural vector autoregression (SVAR) model. It enables the authors to decompose inflation into its domestic and foreign component via historical decomposition analysis. Results indicate that foreign shocks are a major factor in explaining inflation dynamics in the medium run, while the short run inflation dynamics is mainly influenced by domestic shocks. Moreover, the importance of the foreign inflation component has had a rising trend in the pre-crisis period in all NMS, while the start of that trend mostly coincided with their accession to the EU. The global financial crisis seems to have decreased the importance of the foreign inflation component, although the results vary across countries. Since foreign shocks proved to be a very important determinant of inflation in NMS, the main policy implication of this study is the need to augment the classical Taylor rule with foreign factors in case of small open economies.

Keywords: domestic and external inflation determinants; historical decomposition; inflation; new EU member states; consumer surveys (search for similar items in EconPapers)
JEL-codes: C22 E31 E52 F41 (search for similar items in EconPapers)
Pages: 31
Date: 2014-10-23
New Economics Papers: this item is included in nep-cba, nep-eec, nep-mac, nep-mon and nep-tra
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (5)

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Related works:
Journal Article: Inflation in New EU Member States: A Domestically or Externally Driven Phenomenon? (2016)
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Persistent link: https://EconPapers.repec.org/RePEc:zag:wpaper:1405

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