Title: What determines inflation?

Authors: Martina Alexová

Addresses: Research Department, National Bank of Slovakia, Imricha Karvasa 1, 813 25 Bratislava, Slovak Republic

Abstract: This paper focuses on the determinants of inflation for new European Union members during the period from 1996 to 2011. We utilise a structural vector error correction model to estimate mark-up or long-run output gap relationships and the analyse dynamic properties of the models. We find that Slovakia, the Czech Republic, Hungary, Poland and Bulgaria can be characterised by cost-push inflation from a long-run perspective whereas demand-side factors are more characteristic for Slovenia, Estonia, Latvia, Lithuania and Romania. Inflation dynamics in short-run inflation were influenced by inertia, labour costs, foreign market competitiveness, production as well as some exogenous shocks. We also investigate the direct relationship between inflation and government deficit; however, there seems to be no interdependency between these variables in the long run.

Keywords: inflation determinants; long-run structural VARs; subset VEC model; mark-up; output gap; deficit; commodity prices; new EU members; European Union; Slovakia; Czech Republic; Hungary; Poland; Bulgaria; cost-push inflation; demand side; Slovenia; Estonia; Latvia; Lithuania; Romania; inflation dynamics; inertia; labour costs; foreign market competitiveness; production; some exogenous shocks; government deficit.

DOI: 10.1504/IJMEF.2012.052500

International Journal of Monetary Economics and Finance, 2012 Vol.5 No.4, pp.345 - 369

Received: 14 May 2012
Accepted: 24 Sep 2012
Published online: 06 Mar 2013 *

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