Inflation Triggers in Transition Economies: Their Evolution and Specific Features

Abstract

Analysis of thirty inflation episodes in sixteen European transition economies, using the probit panel model with fixed effects, uncovers inflation triggers that overlap with those obtained in either developing or developed countries or both. However, we found some transition-specific features. Thus, the relative contribution of the triggers evolves as transition progresses, such that the early dominance of the output gap, the fiscal deficit, and elections are subsequently subdued by a rise in food and oil prices, the exchange rate regime, and the current account deficit. The last two triggers could be linked to deep financial integration in Europe and the consequent large flow of capital toward European transition economies in the 2000s, a phenomenon not observed in any other part of the world. In addition, the exchange rate regime as an inflation starter in transitional Europe may be due to its convergence with developed Europe and the resulting real appreciation of currency.KEY WORDS: inflation starts, probit with fixed effects and nonstationary variables, transition economies.

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

“…To corroborate this claim, Stavrev (2006) and Égert (2011) analyze the CPI weight of energy consumption and find that the NMS consume 40 to 100 percent more energy than the core EU member states. This finding is in line with Petrović, Mladenović and Nojković (2011), who find that the transition process in European countries has altered in a way that the demand shocks lose their significance, while the supply shocks such as the oil prices begin to dominate. With that in mind, it would be expected that the commodity price shocks have a strong impact on inflation dynamics in NMS.…”