Globalization of Inflation: Evidence from Balkan, Visegrad and Baltic Countries

Abstract

Globalization of Inflation (GI) is a recently surged hypothesis that indicate the relatively more importance of foreign dynamics (output slack) in driving the inflation compared to domestic factors. The purpose of this study is to analyze the validity of GI hypothesis for the 16 Eastern European economies over a recent period, 2011-2025. The set of countries include several homogenous groups such as Balkan countries, Visegrad and Baltic countries. The novelty of the paper comes from the fact that GI hypothesis has mostly been unstudied for the transition economies which have experienced a massive liberalization over the last few decades. Also, unlike the existing studies, our dataset represents a very recent period that includes crucial inflationary developments such as Covid-19 outbreak, recent loosening of monetary policy, etc. We take Backward Philips Curve as a theoretical basis and analyze the hypothesis by applying a range of panel methods. We employ domestic and foreign output gaps, lagged inflation, oil prices, Eurozone inflation rate and Covid-19 dummy in terms of regressors. As a result, we find evidence that GI holds for Balkan countries but the evidence on Visegrad and Baltic countries is only partial and weaker. European output gap has been relatively more significant than the domestic output gap in Balkan countries whereas this finding is not true for Visegrad and Baltic countries. This represents a novel finding in the current literature.