High Inflation in the Baltics: Disentangling Inflation Dynamics and Its Impact on Competitiveness

By Alice Fan, Bingjie Hu, Sadhna Naik, Neree C.G.M. Noumon, Keyra Primus

March 15, 2024

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Format: Chicago

Alice Fan, Bingjie Hu, Sadhna Naik, Neree C.G.M. Noumon, and Keyra Primus. High Inflation in the Baltics: Disentangling Inflation Dynamics and Its Impact on Competitiveness, (USA: International Monetary Fund, 2024) accessed November 21, 2024

Disclaimer: IMF Working Papers describe research in progress by the author(s) and are published to elicit comments and to encourage debate. The views expressed in IMF Working Papers are those of the author(s) and do not necessarily represent the views of the IMF, its Executive Board, or IMF management.

Summary

This paper identifies and quantifies the drivers of inflation dynamics in the three Baltic economies and assesses the effectiveness of fiscal policy in fighting inflation. It also analyzes the macroeconomic impact of inflation on competitiveness by focusing on the relationship between wages and productivity in the tradeable sector. The results reveal that inflation in the Baltics is largely driven by global factors, but domestic demand matters as well, suggesting that fiscal policy can play a role in containing inflation. Also, there is robust evidence of a long-run (cointegration) relationship between (real) wages in the tradeable (manufacturing) sector and productivity in the Baltics with short-term deviations self-correcting in Estonia and Lithuania only.

Subject: Fiscal policy, Fiscal stance, Inflation, Labor, Labor markets, Prices, Production, Productivity, Wages

Keywords: Baltics, Competitiveness, Energy inflation, Fiscal stance, Food inflation, Global, Inflation, Inflation Dynamics, Inflation in the Baltic, Labor markets, Labor productivity Wage-Productivity nexus, Productivity, Wage-Productivity growth nexus, Wages

Publication Details

Pages:

35
Volume:

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DOI:

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Issue:

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Series:

Working Paper No. 2024/061
Stock No:

WPIEA2024061
ISBN:

9798400270826
ISSN:

1018-5941

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