High Inflation in the Baltics: Disentangling Inflation Dynamics and Its Impact on Competitiveness
IMF Working Papers, March 15, 2024
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Bibliographic details
- Authors: Alice Fan, Bingjie Hu, Sadhna Naik, Neree C.G.M. Noumon, Keyra Primus
- Published: March 15, 2024
- Series: IMF Working Papers
- DOI: https://doi.org/10.5089/9798400270826.001
Summary
- Identifies and quantifies the drivers of inflation dynamics in the three Baltic economies.
- Assesses the effectiveness of fiscal policy in fighting inflation.
- Analyzes the macroeconomic impact of inflation on competitiveness by focusing on the relationship between wages and productivity in the tradeable sector.
- Main result: 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.
- Main result: 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.
Major findings
- Inflation drivers
- Global factors are the primary drivers of inflation in the Baltics.
- Domestic demand also contributes meaningfully to inflation dynamics.
- Fiscal policy role
- Fiscal policy can play a role in containing inflation given the contribution of domestic demand.
- Wage-productivity relationship
- Robust long-run (cointegration) relationship between (real) wages in the tradeable (manufacturing) sector and productivity in the Baltics.
- Short-term deviations from this relationship are self-correcting in Estonia and Lithuania only (not in all three Baltics).
Policy implications and recommendations
- Use of fiscal stance
- Given domestic demand’s contribution to inflation, a prudent fiscal stance can help contain inflationary pressures.
- Competitiveness considerations
- Monitoring and aligning wage growth with productivity in the tradeable/manufacturing sector is important for maintaining competitiveness.
- Pay particular attention to mechanisms that correct short-term deviations in Estonia and Lithuania and explore policy options for Latvia where self-correction is not evidenced.
Analytical focus and scope
- Geographic scope: the three Baltic economies.
- Sectoral focus: tradeable sector, with emphasis on manufacturing for the wage-productivity nexus.
- Approach: identification and quantification of inflation drivers; assessment of fiscal policy effectiveness; cointegration analysis of wages and productivity.
Alice Fan, Bingjie Hu, Sadhna Naik, Neree C.G.M. Noumon, and Keyra Primus. "High Inflation in the Baltics: Disentangling Inflation Dynamics and Its Impact on Competitiveness", IMF Working Papers 2024, 061 (March 15, 2024).
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