Convergence of Relative Prices and Inflation in Central and Eastern Europe

IMF Working Papers, September 1, 2001

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Assesses inflation risks from convergence of structures of relative prices in Central and Eastern European (CEE) countries toward the European Union (EU).
Core idea: under low downward flexibility of domestic nominal prices, adjustment of relative price structures is likely to lead to higher inflation.
Framing: presented as an extension of the standard Balassa-Samuelson explanation of international variability in price levels.

The degree of differences in the structures of relative prices in transition economies vis-à-vis EU economies has a strong negative relationship to price levels in the transition economies.
Based on calculations in the paper, likely future inflationary pressures can stem from the remaining differences between the structures of relative prices in the CEE economies and the EU.
Emphasizes the role of sticky (low downward flexibility) domestic nominal prices in translating relative price structure convergence into inflationary pressures.

Convergence of relative price structures toward EU norms can generate inflationary pressures when downward nominal price flexibility is limited.
The authors’ approach provides a framework for assessing inflation risks beyond the traditional Balassa-Samuelson channel by explicitly linking structural relative price differences to potential inflation outcomes.

Convergence of Relative Prices and Inflation in Central and Eastern Europe - WP/01/124
- Convergence of Relative Prices and Inflation in Central and Eastern Europe - WP/01/124 (Markdown version)
- Convergence of Relative Prices and Inflation in Central and Eastern Europe - WP/01/124 (PDF)