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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.
Inflation is one of key policy variables in the European Union. Keeping inflation below 2 percent is the main proclaimed goal of the European Central Bank. Monitoring inflation dynamics is even more important for the EU candidate countries, as it forms a crucial part of the so called Maastricht criteria. For Western Balkan countries, which have all experienced a hyperinflation period at the first phase of transition, inflation awareness seems to be even more relevant than in case of old EU member states. Although the recent past evidence has shown that the Western Balkan countries have gone through the period of mild inflation rates, the underlying instabilities of their economies might bring about yet another inflation spin.However, a literature on the determinants of the inflation generation process in the Western Balkan countries is, with a few notable exceptions, scarce. Even less is publicly available on the forecasting practices of the region's central banks. Since this variable is expected to be one of the most strictly monitored if and when Western Balkan countries realise their EU aspirations, the analysis provided in this paper will try to fill the existing gap in the literature.
The quality of economic governance is one of the prerequisites for sustainable and faster economic development of the Western Balkan countries, having in mind their historical background, dissolution of the ex-Yugoslavia, specific economic circumstances during the transition recession of the 1990s, slow economic recovery at the beginning of the twenty-first century, strong impact of the global financial and economic crisis, and long and complexed path towards the European Union (EU). The main research problem in this paper is examining the dynamic relationships among government effectiveness, inflation, and GDP across Albania, Bosnia and Hercegovina, Kosovo, Montenegro, North Macedonia, and Serbia. We employ the Worldwide Governance Indicators of the World Bank, namely, the Governance Effectiveness Indicator, as one of the six broad dimensions of governance. Using a structural VAR approach, we examine the time-varying effects of economic governance shocks on inflation and economic growth dynamics for each of the Western Balkan (WB) countries in the period of January 2006 to December 2018. Our findings allow the WB policymakers to understand the impact of institutional strength involved in identifying the onset of sustainable development dynamics and the EU integration process in WB better and develop more effective government regulations that can be employed nationally.
The importance of experimental economics and econometric methods increases with each passing day as data quality and software performance develops. New econometric models are developed by diverging from earlier cliché econometric models with the emergence of specialized fields of study. This book, which is expected to be an extensive and useful reference by bringing together some of the latest developments in the field of econometrics, also contains quantitative examples and problem sets. We thank all the authors who contributed to this book with their studies that provide extensive and accessible explanations of the existing econometric methods.
Inflationary pressures have intensified in the Gulf Cooperation Council (GCC) in 2021-2022, mainly driven by a pick-up in tradeable goods inflation. Despite this increase, inflation remained relatively contained as compared to regional comparators. This paper aims to provide a comprehensive analysis of inflation dynamics in the region, with a focus on external factors because of GCC’s high reliance on international trade. Using a Global Vector Autoregressive model with quarterly data from 1987 to 2022, we find that external factors such as the imported inflation from main trading partners, mainly driven by China, and nominal effective exchange rate (NEER) are the main drivers of inflation in the GCC region. Additionally, we find that the direct pass-through of international commodity price shocks such as oil and raw agricultural materials is somewhat limited, after controlling for trading partners’ inflation, which can be explained by the prevalence of subsidies and administered prices in the region. Overall, since external factors are the main drivers of domestic inflation in the GCC, an increased focus on diversification, promoting food security, and ensuring prudent central bank policies, including through effective liquidity management frameworks, can play a key role in managing this impact.
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.
The Montenegrin economy has rebounded strongly from the COVID-19 shock as private consumption grew, tourism recovered, and an influx of relatively affluent Russian and Ukrainian nationals due to Russia’s war in Ukraine has also contributed to growth. While debt-to-GDP ratios have improved largely due to nominal effects, fiscal weaknesses remain. After prolonged political uncertainty, a new coalition government formed in October 2023. Thereafter, a new Central Bank (CBCG) Governor was appointed in December 2023.
The war in Ukraine is taking a growing toll on Europe’s economies. The worsening energy crisis has depressed households’ purchasing power and raised firms’ costs, only partly offset by new government support. Central banks in the region and the world are acting more forcefully to bring high and persistent inflation down to targets, and global financial conditions have tightened. European policymakers are facing severe trade-offs and tough policy choices. A tightening macroeconomic policy stance is needed to bring down inflation, while helping vulnerable households and viable firms weather the energy crisis. But policies need to stay nimble and agile and adjust should additional shocks materialize.
Two main themes of the book are that (1) politics can distort optimal fiscal policy through elections and through political fragmentation, and (2) rules and institutions can attenuate the negative effects of this dynamic. The book has three parts: part 1 (9 chapters) outlines the problems; part 2 (6 chapters) outlines how institutions and fiscal rules can offer solutions; and part 3 (4 chapters) discusses how multilevel governance frameworks can help.
Today, more than fifteen years after the end of the wars that accompanied Yugoslavia's dissolution, the "Balkan question" remains more than ever a "European question". In the eyes of many Europeans in the 1990s, Bosnia was the symbol of a collective failure, while Kosovo later became a catalyst for an emerging Common Foreign and Security Policy (CFSP). In the last decade, however, the overall thrust of the EU's Balkans policy has moved from an agenda dominated by security issues related to the war and its legacies to one focused on the perspective of the Western Balkan states' accession to the European Union. This Chaillot Paper, which features contributions from authors from various parts of the region, examines the current state of play in the countries of the Western Balkans with regard to EU accession. It brings together both views from the Balkans states themselves and overarching thematic perspectives. For the first time the European Union has become involved in the formation of new nation-states that also aspire to become members of the Union. The EU's transformative power has proved effective in integrating established states; now it is confronted with the challenge of integrating new and sometimes contested states. Against this background, this paper makes the case for a concerted regional approach to EU enlargement, and a renewed and sustained commitment to the European integration of the Western Balkans.