Catching-Up and Inflation in Europe: Balassa-Samuelson, Engel’s Law and Other Culprits

Posted: 12 Mar 2012

See all articles by Balázs Égert

Balázs Égert

Organization for Economic Co-Operation and Development (OECD); CESifo (Center for Economic Studies and Ifo Institute); Université Paris X Nanterre - Department of Economics; William Davidson Institute

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Date Written: March 12, 2012

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 persistent 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

JEL Classification: E43, E50, E52, C22, G21, O52

Suggested Citation

Egert, Balazs, Catching-Up and Inflation in Europe: Balassa-Samuelson, Engel’s Law and Other Culprits (March 12, 2012). Economic Systems, Vol. 35, No. 2, 2011, Available at SSRN: https://ssrn.com/abstract=2020258

Balazs Egert (Contact Author)

Organization for Economic Co-Operation and Development (OECD) ( email )

2 rue Andre Pascal
Paris Cedex 16, 75775
France

CESifo (Center for Economic Studies and Ifo Institute)

Poschinger Str. 5
Munich, DE-81679
Germany

Université Paris X Nanterre - Department of Economics

Nanterre Cedex, 92001
France

William Davidson Institute

724 E. University Ave.
Wyly Hall
Ann Arbor, MI 48109-1234
United States

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