Inflation Dynamics in the New EU Member States: How Relevant Are External Factors?

Abstract

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

“…Centered 3-year rolling window correlations (36 observations) have been calculated in order to gain insight into both the dynamics and importance of 11 The possible explanation for the pronounced significance of the domestic component of inflation in Romania could be the high inflation rates at the beginning of the sample period, occurring in the aftermath of a domestically-driven hyperinflation episode. Furthermore, Mihailov, Rumler and Scharler (2011b) argue that the importance of domestic vis-à-vis foreign factors is usually more pronounced in larger economies in the sample due to the so-called size effects, which seems to be the case here. The domestic component seems to be the most pronounced in two largest countries -Poland and Romania, while it is the least important in three smallest economies -Latvia, Lithuania and Croatia.…”

“…To the best of the authors' knowledge, the only study formally comparing the relevance of domestic and external inflation drivers in the CEE economies is the one by Mihailov, Rumler and Scharler (2011b). They estimate the NKPC for 12 NMS (within the 2004 and 2007 enlargements), repeating the exact same empirical exercise as in Mihailov, Rumler and Scharler (2011a).…”

“…First of all, it comprises a much wider set of explanatory variables than the NKPC framework of Mihailov, Rumler and Scharler (2011b). To be specific, several domestic variables (inflation expectations, output gap, M1, and the nominal effective exchange rate) and external factors (eurozone output gap, EURIBOR and Brent Crude oil price) are considered.…”

“…To be specific, several domestic variables (inflation expectations, output gap, M1, and the nominal effective exchange rate) and external factors (eurozone output gap, EURIBOR and Brent Crude oil price) are considered. Second, Mihailov, Rumler and Scharler (2011b) base their analysis on a static NKPC regression, inspecting the importance of domestic and external inflation determinants by mere comparison of their estimated regression coefficients. Contrary to that, this paper bases its empirical analysis on the structural vector autoregression (SVAR) model, enabling the authors to examine the temporal interdependence of the observed variables.…”

Estimating the New Keynesian Phillips Curve for the UK: evidence from the inflation-indexed bonds market

“…In the above equation (2), the actual inflation rate π t is calculated as the annual percentage change in the Retail Price Index (RPI), and g t represents the output gap computed as the deviation of real GDP from trend output based on standard Hodrick Prescott (HP) filter ( Gali 2002;Jondeau and Le Bihan 2005;Mihailov, Rumler, and Scharler 2011). 11 We also specify a model where the output gap is treated as unobserved and jointly estimate it with the other parameters of the model.…”