Catching-Up And Inflation In Europe: Balassa-Samuelson, Engel's Law And Other Culprits

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This paper 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, the authors show that the Balassa-Samuelson effect is not an important driver of inflation rates. By contrast, they 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. They interpret these results as a sign that price level convergence comes from goods, market and non-market service prices.