The investigation of inflation persistence in Croatia in the period of 2005–2013

Abstract

The aim of this article is to analyse the inflation persistence phenomenon in the theory of economics and in Croatian economy. In the economic literature there are only few studies on the phenomenon of inflation persistence in Croatia. That is why we try to fill the gap in this area by analysing the phenomenon of inflation persistence in the Croatian economy, with particular emphasis of this phenomenon for different groups of goods and services. In this article we use a research method based on literature studies in the field of macroeconomics and international finance and econometric methods (Bayesian Vector Autoregression Model [BVAR]). All statistical data used in this article were monthly data and covered the period from January 2005 to December 2013 (108 months) and their source was United Nations Economic Commission for Europe (UNECE) Statistical Division Database. It provides detailed statistical information on countries in Europe, North America and Central Asia. The calculated inflation persistence coefficient in Croatia stood at 0.88 in the period 2005– 2013, which apparently confirmed the occurrence of high inflation persistence in this economy. High inflation persistence means a slow return of inflation to its long-run value after a shock. A high degree of inflation persistence should be a signal for the economic authorities of a country to initiate indispensable institutional and labour market reforms which usually increase flexibility of domestic economy and lead to a reduced degree of inflation persistence.