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© 2023 International Monetary Fund
WP/23/49
IMF Working Paper
European Department
Inflation Dynamics in the Western Balkans
Prepared by Gohar Minasyan, Ezgi Ozturk, Magali Pinat, Mengxue Wang, and Zeju Zhu*
Authorized for distribution by Yan Sun
March 2023
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.
ABSTRACT: After trailing Euro Area inflation closely in the recent past, inflation in the Western Balkans has accelerated faster since early 2022 on the back of the shocks to global commodity prices, strong recovery from the pandemic, and lingering supply bottlenecks. This paper employs two complementary empirical approaches of an augmented Phillips curve and structural VAR, adapting them to the data availability and country specificities of the Western Balkans, to analyze the inflation dynamics in the region. It finds that international food prices affect not only headline but also core inflation as well as inflation expectations. Further, inflation in the Western Balkans is not just determined by foreign shocks, and domestic factors, aggregate demand shocks in particular, have a significant impact on inflation. These findings imply a possible role for policies to temporarily limit an immediate and complete pass-through of international to domestic food prices while also stressing the importance of an appropriate domestic macroeconomic policy mix to keep inflation expectations anchored and safeguard credibility in the face of high inflation persistence.
RECOMMENDED CITATION: Minasyan, G., E. Ozturk, M. Pinat, M. Wang, Z. Zhu, 2023. Inflation Dynamics in the Western Balkans. IMF Working Paper no. WP/23/49.
| JEL Classification Numbers: | E31, E37 |
| Keywords: | Inflation; Western Balkans; international food price shocks; commodity price shocks; Phillips curve; panel data; structural VAR |
| Author's E-Mail Address: | gminasyan@imf.org, eozturk@imf.org, mpinat@imf.org, mwang3@imf.org, zzhu2@imf.org |
| JEL Classification Numbers: | E31, E37 |
| Keywords: | Inflation; Western Balkans; international food price shocks; commodity price shocks; Phillips curve; panel data; structural VAR |
| Author's E-Mail Address: | gminasyan@imf.org, eozturk@imf.org, mpinat@imf.org, mwang3@imf.org, zzhu2@imf.org |
Title Page
WORKING PAPERS
Inflation Dynamics in the Western Balkans
Prepared by Gohar Minasyan, Ezgi Ozturk, Magali Pinat, Mengxue Wang, and Zeju Zhu1
Contents
1. INTRODUCTION
2. STYLIZED FACTS
3. LITERATURE REVIEW
4. PANEL REGRESSION ANALYSIS
5. STRUCTURAL VAR ANALYSIS
6. CONCLUSIONS
REFERENCES
FIGURES
1. Inflation in the Western Balkans and the Euro Area
2. Inflation Developments in the Western Balkans
3. SVAR Results: Forecasts Error Variance Decomposition for Inflation
4. SVAR Results: Historical Decomposition for Inflation
TABLES
1. Headline, Core and Trimmed-mean Inflations Determinants
2. Processed and Unprocessed Foods and Energy Domestic Prices
3. Determinants of Inflation Expectations
4. Identification of Structural Shocks for Countries with Independent Monetary Policy
5. Identification of Structural Shocks for Countries without Independent Monetary Policy
APPENDICES
I. Stylized Facts Charts and Tables
II. Data Definitions and Sources
III. Additional Tables on Empirical Results
The authors would like to thank Yan Sun for overall guidance, Romain Duval, Jorg Decressin, Jan Kees Martijn, participants at the IMF European department seminar, the seminars at the Bank of Albania, the Central Bank of Montenegro, and the Central Bank of Kosovo for helpful comments and suggestions.