Inflation dynamics in the euro area and in new EU members: Implications for monetary policy

Abstract

The paper provides evidence on New Keynesian Phillips Curves (NKPCs) for the euro area and a group of seven new member countries that joined the European Union (EU) in and after 2004 employing two alternative methods of estimation: the generalized method of moments (GMM) and time-varying coefficient (TVC) estimation techniques. The latter technique has the advantage over the former technique in that it can deal with possible specification biases and can detect spurious relationships that may have arisen from the structural changes of the past decades. The NKPCs are used to compare inflation dynamics between the euro area and the group of seven new member countries and are connected with sufficient conditions for monetary policies to be good policies. If the slopes of the short run Phillips curves are similar, in that the frequency of nominal price adjustments are comparable, the implication is that a one-size monetary policy may fit all — that is, both the euro area and the group comprising the new members.