This study estimates the catching-up effect of Slovenia, comparing the periods before and after the ERM II. The empirical specification of Balassa-Samuelson catching-up model (Mihaljek and Klau, 2003) is as follows:
where PNT and PT denote indices of non-tradable and tradable prices. LPT and LPNT denote labor productivity of tradable and non-tradable sector respectively. δ and γ are factor intensities in non-tradable and tradable in tandem. For simplicity, δ and γ are assumed to be equal.
Several sets of price indices from the harmonized index of consumer prices (HICP) and producer price index (PPI) are considered as proxies for the relative price of non-tradable goods (PNT/PT). The first three ratios follow Egert et al. (2003). The first ratio-HICP over PPI- assumes all items except goods in HICP are non-tradables. The ratio measures the sum of non-tradable and tradable prices divided by tradable prices. On the other hand, the second ratio-services in HICP over HICP- can be viewed as non-tradable prices divided by the sum of tradable and non-tradable prices. The third ratio defines as services in HICP over PPI. The ratio becomes closer to the definition of the relative price of non-tradables, however, it is hard to quantify the effect of an increase in service prices on overall inflation. The last ratio uses services in HICP over goods in HICP which seems to be the closet approximation for non-tradable to tradable price ratio and the two combined should capture all changes in inflation.
Labor productivity is calculated from sectoral output and employment data of national account.8 The labor productivity of tradable sector is measured by the ratio of output to employment in agriculture, fishing, mining and manufacturing. That of non-tradable sector is then the ratio of output to employment of the rest in national account. Quarterly data range from 2000:Q1 to 2008:Q2.
Caprirolo, G. C., 2008, “What Happened with the Inflation Rate in 2007 and What Shall We Do about It?,” presented for research seminar at the Bank of Slovenia.
Choueiri, N., F. Ohnsorge, and R.V. Elkan, 2008, “Inflation Differentials in the EU: A Common (Factors) Approach with Implications for EU8 Euro Adoption Prospects,” IMF Working Paper 08/21, (Washington: IMF).
Dohring, B. and A. Mordonu, 2007, “What Drives Inflation Perceptions? A Dynamic Panel Data Analysis,” European Economy Economic Paper No. 284, European Commission.
Egert, B., I. Drine, K. Lommatzsch, and C. Rault, 2003, “The Balassa-Samuelson Effect in Central and Eastern Europe: Myth or Reality?,” Journal of Comparative Economics, 31, p.552– 572.
Institute of Macroeconomic Analysis and Development (IMAD), 2007, “Euro Changeover Effect on Inflation in Slovenia,” Press Releases.
Mihaljek, D. and M. Klau, 2003, “The Balassa-Samuelson Effect in Central Europe: a Disaggregated Analysis,” BIS Working Papers No. 143.
Rother, P.C., 2000, “The Impact of Productivity Differentials on Inflation and the Real Exchange Rate: an Estimation of the Balassa-Samuelson Effect in Slovenia,” IMF Staff Country Report No. 00/56, (Washington: IMF).
Prepared by Piyaporn Sodsriwiboon.
Through out this paper we use inflation for HICP inflation unless specified otherwise.
The contribution of domestic commodity prices in the HICP inflation shown in Figure 2 is calculated as the increase in domestic food and fuel prices weighted by their shares in the HICP basket.
The pass-through from international to domestic prices of food and fuel is obtained from country-by-country bivariate regressions (WEO, Oct 2008):
The pass-through from domestic commodity prices to core inflation is estimated using Phillips curve equations with domestic prices net of any influences. The full long-term pass-through is calculated as the sum of coefficients on the current value and four lags of the independent variable divided by one minus the sum of coefficients on the four lags of the dependent variable. (WEO, Oct 2008)
The reported estimates show the weighted averaged of country-by-country estimates using quarterly data from 1995 to 2008 for 25 emerging economies and 21 advanced economies, and from 2001 to 2008 for Slovenia.
The estimate is slightly smaller than a recent finding by Caprirolo (2008) that a one percent increase in food prices resulted in a 0.88 percent increase in core inflation in the long run.
The greater trade and investment opportunities after the entry in the euro area may have contributed to the improvement of Slovene productivity, particularly in the tradable sector. The Balassa-Samuelson model provides a supply-side explanation for the relative price of tradables and non-tradables in an economy. Specifically, Balassa (1964) and Samuelson (1964) argued that faster productivity growth in the tradable sector pushes up overall wages if wages are equalized across sectors, leading to a rise in the relative price of nontradable goods. This would explain why inflation is faster in economies that are catching up with richer trading partners.
Value added by activities and GDP at 1995 prices and employment by activities and by sectors from the statistical office of the republic of Slovenia
Berger, A. and others, 2004, “Bank Concentration and Competition: An Evolution in the Making,” Journal of Money, Credit and Banking, Vol.36, (June), pp.433– 51.
Prepared by Yuan Xiao.
The liquidity ratio is the ratio between the sum of financial assets in local and foreign currencies and the sum of liabilities in local and foreign currencies with regard to residual maturity. A bank will classify financial assets and liabilities by residual maturity in the following two categories of maturity bands: (i) category one: financial assets and liabilities with a residual maturity of up to 30 days, and (ii) category two: financial assets and liabilities with a residual maturity of up to 180 days.
The available data group together not only the liabilities of banks but also other domestic sectors (which accounted for 1/5 of the total amount depicted in Figure 9), but it is clear that Austria and Germany are the largest lenders.