Zorica Mladenovic, Ph.D. and Aleksandra Nojkovic, Ph.D. Faculty of Economics, University of Belgrade, Kamenicka 6, Belgrade, 11000, Serbia and Montenegro
The purpose of the paper is to identify main factors that determine the start of 28 inflation episodes in 15 transition countries between 1993 and 2008. Transition economies have faced high inflation rates at the beginning of transition process. After the initial period of successful macroeconomic stabilization, these countries have experienced significant decline in inflation rate since the early-1990s. Following the period of relatively low inflation rates trend of inflation path has changed direction exhibiting a sustained rise in recent years in most of the transition economies. Research on the events and policies that triggered inflation episodes may enable further understanding of circumstances under wich inflation episodes are likely to reoccur in the future.
We have used pooled probit analysis to investigate the factors associated with the conditional probability of an inflation start in transition economies. Within the models employed the dependent variable is a binary variable, which takes on a value of 1 if an inflation start took place in that country during that year and a value of 0 otherwise. Prior to the empirical investigation we have defined inflation starts and inflation episodes following the Boschen-Weise approach. We stack the data for each country and estimate probit model using the method of maximum likelihood. The regressions are run with annual data.
The empirical results indicate that an increase in the output gap above-trend real economic activity, expansionary fiscal policy and increases in oil and food prices raise the probability of inflation starts in transition economies. General elections also played an important role in triggering inflation episodes. It is possible that elections are an endogenous response to economy prior to elections that trigger inflation episodes, so we conducted some additional research on this finding. Some other potential factors of inflation starts, such as: increase in natural rate of unemployment, the international transmission of inflation (the EU inflation), exchange rate regimes, changes in the political orientation of government and level of openness to trade are not supported by the data. Our results suggest that these factors did not have systematic effect in our sample of inflation episodes, but they could be important factors in explaining some of the individual episodes.