Asymmetric Dynamics of Inflation Inertia in Some Selected Non-Eurozone European Countries

Abstract

Relevance. Inflation inertia refers to the persistence of inflation over time and can be caused by a variety of factors, including expectations about future inflation, the structure of the economy, and the behavior of economic agents. Over the past two decades, the European economy has grappled with a range of challenges and currently seeks to mitigate the negative impacts of the global pandemic. Research objective. Persistent inflation can lead to uncertainty, decreased investment, and a loss of confidence in an economy. Non-eurozone economies can also face challenges in controlling inflation due to such factors as the lack of monetary integration with the eurozone, limited access to the European Central Bank's resources, and the lack of a unified currency. Hence, for a more effective monetary policy in these countries, it is necessary to measure and understand the inflation inertia. This paper offers a novel empirical study of the dynamics of inflation inertia for seven EU economies that are not part of the eurozone. Data and methods. To achieve the research objective, three non-linear unit root tests are employed to consider both structural changes and regime switching. These tests allowed for the inclusion of almost all non-linear dynamics observed in the inflation series. In addition, the tests involve the use of the dynamic rolling windows sample approach in order to provide more sensitive measurements of the effect of time-varying shocks on inflation inertia. Results. According to the static sample analysis of 200 observations, Bulgaria, Croatia, and the Czech Republic have inflation inertia. Sweden, Romania, Hungary, and Poland do not have inflation inertia when non-linear regime switching dynamics and structural change are considered. However, Croatia and the Czech Republic show a mostly non-stationary inflation in dynamic rolling windows sampling. Hungary has persistent inflation even though it was not detected in the static sample analysis. The shocks of inflation fade out in Bulgaria, Poland, Romania, and Sweden with non-linear dynamics. If non-linear dynamics is ignored, it can lead to misleading results in economic time series. Conclusions. Inflation inertia can be influenced by a variety of factors, including the global pandemic, global or regional conflicts and monetary policy preferences. The successful management of inflation inertia in Romania and Sweden may serve as a model for other economies that have demonstrated an ability to effectively address and mitigate the challenges posed by inflation inertia.