Driving Forces of Inflation in New EU Countries (in English)

Driving forces of inflation in the eight new EU member states from Central and Eastern Europe are analyzed using the generalized dynamic-factor model (GDFM) developed by Forni et al. the impact of various macroeconomic variables on inflation is estimated by regressing the GDFM idiosyncratic component on these variables; the importance of second-round and indirect effects from energy shocks is assessed using a bivariate VAR. The author´s results suggest that, first, a significant part of inflation in the new members is driven by common factors, and, second, common component inflation is a better estimator of underlying inflation than a core inflation measure (i.e., headline inflation, excluding energy, food, alcohol, and tobacco).