inflation differentials in europeef0a2fa8-4873-4136-a346-b22cfe0e152f… · puzzle i. large...

Inflation Differentialsin Europe

Balázs ÉgertEconomics Department, OECD

Objectives of the presentation

Different factors driving inflation rates in Europe

Differences between mature and catching-up countries

Balassa-SamuelsonPuzzle I.

Large productivity gains in the tradable sector

and yet low Balassa-Samuelson effect in the CPI

The Balassa-Samuelson Puzzle

B-S effect

inflation 1997-2005

inflation 2005

Source: based on Égert, Halpern and MacDonald (2005)

Balassa-SamuelsonPuzzle II.

Large literature showing low B-S effect

and yet policymakers still argue in terms of the Balassa-Samuelson effect

The Balassa-Samuelson Puzzle

4 elements of the puzzle

The Balassa-Samuelson PuzzleLarge dispersion of productivity gains in tradables

Productivity <->WagesIncomplete wage equalizationLarge productivity gains in non-tradablesLow share of market-based non-tradables in the CPI

Large Dispersion of ProductivityGrowth in Manufacturing

Figure 6. Dispersion of Productivity Growth in Manufacturing

0%2%4%6%8%

10%12%14%16%18%20%

FI SE BE NL

a FR DK ES IT HU PL

SI -2 SK

- 2 HR

productivity grow th

SD of productivity grow th w ithin manufacturing

Wage EqualisationFigure 2c. Difference between annual gross nominal wage growth in market services and

manufacturing (1995-2005)

-2.0%-1.5%

0.0%0.5%

Large Productivity Gains in Nontradables (1995-2005)

eden UK

TRADABLESNONTRADABLES

Low Share of Market Nontradablesin CPI

Simple accounting framework

))(1( NTTSB prodprodp −−=− α

DE FR NL

LU FI IT IE ES PT

EE LV LT BG

CEEWestern Europe

Low Share of Market Nontradables in the CPI (2005)

Implications

For the inflation rate

For the real exchange rate

Structural factorsServices/nontradable goods

The usual suspect: Balassa-SamuelsonAdministered/regulated pricesResidential property prices

Tradable goods prices

Tradable GoodsQuality increases

Extension of Engel’s Law:

richer households consume goods of better quality than poorer household;

Real convergence => higher share of goods of higher quality => higher price

Quality increasessame good

example (from 2005): cherry tomato (origin Israel)

Hungary: 250g, 119 HUF (0.40 - 0.50 EUR); 2. class

Austria: 250g, 0.99 – 1.59 EUR; 1. class

Tradable Goods

Pricing-to-Market Practices => cars (very homogenous goods)

Figure 12. The Relative Price Level of Cars (euro area=1, 2006)

euro area price level (VAT included) = 1

be at ie fr pt nl es it fi gr de se uk dk cy mt

cz pl sk lv lt ee si hu

segment B segment C segment D segment E segment F

Tradable Goods

Distribution Sector

Tradable Goods

. Productivity Growth in the Distribution Sector, Annual Averages, 1995-2004

BE IT FR IE SE DK

LV LT EE PL SI HU

Empirical Exercise

Panel estimations

Annual data

Euro area + CEE countries

STRUCTURAL FACTORSBALASSA-SAMUELSON EFFECT

B-S WIDE (CONST.)B-S NARROW (CONST.)PRODUCTIVITY DIFF.

REGULATED PRICES 3 measuresOTHER STRUCTURAL FACTORS

SHARE OF RECREATION IN THE HICP SHARE OF FOOD IN THE HICPREAL FINAL HOUSHOLD CONSUMPTIONPRICE LEVEL 97 (CONST.)GDP PER CAPITA

CYCLICAL FACTORS2 measures of OUTPUT GAPULCGOV. SURPLUS/DEFICIT

EXTERNAL FACTORSOIL PRICENEER

OTHER FACTORSHOUSE PRICESVAT INCREASES AND DECREASESMONETARY AGGREGATES

EXTERNAL FACTORSPRICE OF OILEXCHANGE RATE and OPENNESS

Table 13b. Euro Area (excluding Luxembourg) + CEE-10 Dependent variable: annual change in the HICP: )(XfPt =

1999-2005 Regulated prices excluded House prices included House prices excluded GMM GMM GMM OLS OLS OLS OLS GMM GMM GMM GMM OLS OLS

CONSTANT 0.781*** 0.817*** 0.843*** 0.796*** 2.134*** 1.896*** INFLATION (-1) 0.200*** 0.276*** 0.255*** 0.301*** 0.302*** 0.319*** 0.320*** 0.306*** 0.307*** 0.228*** 0.198*** 0.242*** 0.244*** CYCLICAL FACTORS OUTPUT GAP1 0.394**** 0.195*** 0.176*** 0.321*** 0.271*** 0.182** OUTPUT GAP2 0.367*** 0.296*** 0.180*** 0.201*** 0.322*** 0.284*** 0.164*** ULC GOV. SURPLUS/DEFICIT -0.106*** -0.064*** BALASSA-SAMUELSON EFFECT B-S WIDE (CONST.) -0.257** -0.283*** B-S NARROW (CONST.) -0.328** -0.351*** PRODUCTIVITY DIFF. REGULATED PRICES REG1 0.351*** 0.397*** 0.268*** 0.266** 0.273*** 0.276*** 0.223*** 0.269*** 0.182*** 0.187*** 0.221*** 0.229*** REG2 REG3 0.310*** OTHER STRUCTURAL FACTORS SHARE OF RECREATION IN THE HICP SHARE OF FOOD IN THE HICP -0.016* -0.034** REAL FINAL HOUSHOLD CONSO PRICE LEVEL 97 (CONST.) -1.199** -0.922* GDP PER CAPITA 0.042*** 0.021*** EXTERNAL FACTORS OIL PRICE (-1) 0.009*** 0.009*** 0.009*** 0.006*** 0.008*** 0.006*** 0.009** 0.009** NEER -0.129** -0.206** NEER (-1) -0.113*** -0.116*** -0.153*** -0.205*** OTHER FACTORS MONETARY AGGREGATES HOUSE PRICES 0.007*** 0.007*** 0.022** 0.017** 0.018** 0.014** 0.013** VAT INCREASES VAT DECREASES R2-adj 0.271 0.380 0.091 0.778 0.778 0.775 0.774 0.411 0.545 0.201 0.268 0.765 0.641 Jarque-Bera normality test (p-value) 0.014 0.116 0.000 0.747 0.717 0.787 0.854 0.000 0.000 0.000 0.000 0.000 0.038 No. of OBS 91 93 91 107 107 107 107 119 119 123 123 134 134 No. of COUNTRIES 17 17 17 17 17 17 17 21 21 21 21 21 21

Notes: See Table 11.

ConclusionCyclical and external factors are very importantStructural factors are also important

services + goodsbut B-S effect is not very important

inflation differentials in europeef0a2fa8-4873-4136-a346-b22cfe0e152f… · puzzle i. large...

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