INFLATION DYNAMICS AND NOMINAL ADJUSTMENT IN THE BALTIC STATES

The paper seeks to explain the inflationary dynamics in the Baltic countries since the mid-1990s. While single-equation estimations generally yield poor results, panel data estimations provide statistically and economically satisfactory findings. Our main result is that the observed gradual disinflation can to a large extent be explained by adjustment to international prices. Stringent fixed exchange rate systems have exerted downward pressure on inflation both directly and via expectations of future inflation. Measures of excess capacity in the labour market have no effect on inflation, while industrial output gaps have some explanatory power. Real oil price shocks have an immediate but short-lived impact on inflation.