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Kiel Institute for World Economics Kiel Working Papers, Kiel Institute for World Economics

No 1373:
What Explains Persistent Inflation Differentials Across Transition Economies?

Felix Hammermann and Mark Flanagan

Abstract: Panel estimates based on 19 transition economies suggests that some central banks may aim at comparatively high inflation rates mainly to make up for, and to perhaps exploit, lagging internal and external liberalization in their economies. Out-of-sample forecasts, based on expected developments in the underlying structure of these economies, and assuming no changes in institutions, suggest that incentives may be diminishing, but not to the point where inflation levels below 5 percent could credibly be announced as targets. Greater economic liberalization would help reduce incentives for higher inflation, and enhancements to central bank independence could help shield these central banks from pressures.

Keywords: inflation, transition economies, panel data; (follow links to similar papers)

JEL-Codes: E58,; P24; (follow links to similar papers)

33 pages, August 2007

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