Inflation differentials in the Eurozone

Zuzana Hlinková

Master's thesis

Abstract:

This thesis focuses on the statistical and econometrical analysis of inflation differentials in thirteen Eurozone countries in the period from 1999 to 2013. Within the scope of the statistical analysis, the evolution of inflation, inflation dispersion, and unit labour costs in the euro area as well as in thirteen member countries is examined. Another part provides an evidence on inflation differentials time series behaviour. The QLR test detects a presence of break for every country, however the break dates do not fit the timing of the financial crisis. Both ADF and Hadri test agree on the lack of convergence, whereas Levin, Lin and Chu test finds that each time series is stationary. Moreover, an idea that the standard unit root tests may be affected by a nonlinear behaviour of inflation differentials is considered. Subsequently, the possible sources and implications of inflation differentials are discussed following a distinction into transitory, permanent, and policy induced factors. The last chapter employs Arellano-Bond estimation in order to determine which factors explain inflation differentials. The results point out to the prevalence of country specific structural factors such as product market regulation. In addition, inflation persistence, economic climate, differences in cyclical positions, and indicators of external position also significantly affect inflation differentials, however its contribution is just minor compared to PMR. Finally, deregulation of the product market through the elimination of state control, barriers to entrepreneurship, and barriers to trade and investment is proposed. Nevertheless, the data suggest that some kind of deregulation is already underway.

Abstract:

This thesis focuses on the statistical and econometrical analysis of inflation differentials in thirteen Eurozone countries in the period from 1999 to 2013. Within the scope of the statistical analysis, the evolution of inflation, inflation dispersion, and unit labour costs in the euro area as well as in thirteen member countries is examined. Another part provides an evidence on inflation differentials time series behaviour. The QLR test detects a presence of break for every country, however the break dates do not fit the timing of the financial crisis. Both ADF and Hadri test agree on the lack of convergence, whereas Levin, Lin and Chu test finds that each time series is stationary. Moreover, an idea that the standard unit root tests may be affected by a nonlinear behaviour of inflation differentials is considered. Subsequently, the possible sources and implications of inflation differentials are discussed following a distinction into transitory, permanent, and policy induced factors. The last chapter employs Arellano-Bond estimation in order to determine which factors explain inflation differentials. The results point out to the prevalence of country specific structural factors such as product market regulation. In addition, inflation persistence, economic climate, differences in cyclical positions, and indicators of external position also significantly affect inflation differentials, however its contribution is just minor compared to PMR. Finally, deregulation of the product market through the elimination of state control, barriers to entrepreneurship, and barriers to trade and investment is proposed. Nevertheless, the data suggest that some kind of deregulation is already underway.

Keywords

product market deregulation, financial crisis, stability tests, inflation, structural factors, product market regulation, inflation differentials, inflation dispersion, absolute convergence, the ECB, equilibrating forces, general-to-specific approach, unit root tests, Eurozone, unit labour costs

Keywords

financial crisis, equilibrating forces, stability tests, inflation dispersion, inflation, product market deregulation, structural factors, general-to-specific approach, unit root tests, Eurozone, product market regulation, absolute convergence, the ECB, unit labour costs, inflation differentials

Language used: English

Date on which the thesis was submitted / produced: 25. 11. 2013

Thesis defence

• Date of defence: 12. 1. 2015
• Supervisor: Anna Klosová
• Reader: Geovane Lorene Bertussi

Vysoká škola ekonomická v Praze

Master programme:
Economics of Globalisation and European Integration