Inflation Dynamics in Southeast Europe: A Panel Econometric Analysis of Monetary Policy Transmission
Main Article Content
Abstract
This paper investigates the relationship between monetary policy and consumer price inflation in nine Southeast European (SEE) economies, with the aim of identifying the key channels through which monetary policy influences inflation dynamics. The analysis is based on an annual panel dataset covering the period 2007–2022. Static panel econometric techniques are applied, combining fixed-effects and random-effects estimators with robust standard errors. Model validity is assessed through cross-sectional dependence tests, panel unit-root tests and the Hausman specification test. The model includes lending interest rates, exchange rates and broad money (M3), alongside control variables such as producer price inflation, unemployment, adjusted net income per capita, domestic credit and foreign direct investment. The results indicate that lending interest rates exert a strong positive and statistically significant effect on inflation, consistent with Neo-Fisherian dynamics under uncertainty. Producer price inflation, domestic credit and foreign direct investment also show positive and significant effects, while broad money (M3) displays a negative coefficient, reflecting structural characteristics and high collinearity with credit aggregates in SEE financial systems. By providing a harmonized multi-country dataset and a comprehensive panel diagnostic framework, the study contributes new empirical evidence on the non-standard transmission of monetary policy in transition economies and offers policy-relevant insights for countries aligning their monetary frameworks with European Central Bank practices.
Article Details
Issue
Section
This work is licensed under a Creative Commons Attribution-NonCommercial-NoDerivatives 4.0 International License.
Once the manuscript is accepted for publication, authors shall transfer the copyright to the publisher. If the submitted manuscript is not accepted for printing by the journal, the authors shall retain all their rights. The following rights on the manuscript are transferred to the publisher, including any supplementary materials and any parts, extracts or elements of the manuscript:
- the right to reproduce and distribute the manuscript in printed form, including print-on-demand;
- the right to print prepublications, reprints and special editions of the manuscript;
- the right to translate the manuscript into other languages;
- the right to reproduce the manuscript using photomechanical or similar means including, but not limited to photocopy, and the right to distribute these copies;
- the right to reproduce and distribute the manuscript electronically or optically using and all data carriers or storage media, and especially in machine readable/digitalized form on data carriers such as hard drive, CD-ROM, DVD, Blu-ray Disc (BD), Mini Disc, data tapes, and the right to reproduce and distribute the article via these data carriers;
- the right to store the manuscript in databases, including online databases, as well as the right to transmit the manuscript in all technical systems and modes;
- the right to make the manuscript available to the public or to closed user groups on individual demand, for use on monitors or other readers (including e-books), and in printable form for the user, either via the Internet, online service, or via internal or external networks.
References
Agoba, A., Fiador, V., Sarpong-Kumankoma, E., & Sa-Aadu, J. (2022). Central bank independence, exchange rate regime, monetary policy and inflation in Africa. In P. Molyneux (Ed.), The economics of banking and finance (pp. 183-225). Palgrave Macmillan.
Airaudo, M., & Hajdini, I. (2023). Wealth effects, price markups, and the Neo-Fisherian hypothesis. European Economic Review, 157, 104482. https://doi.org/10.1016/j.euroecorev.2023.104482
Baltagi, B. (2021). Econometric analysis of panel data (6th ed.). Springer.
Beck, N., & Katz, J. (1995). What to do (and not to do) with time-series cross-section data. American Political Science Review, 89(3), 634-647. https://doi.org/10.2307/2082979
Boissay, F., Collard, F., Manea, C., & Shapiro, A. (2025). Monetary tightening and financial stress during supply- versus demand-driven inflation. International Journal of Central Banking, 21(2), 147-220.
Bouakez, H., & Kano, T. (2024). Deciphering the Neo-Fisherian effect. Centre for Applied Macroeconomic Analysis. Australian National University. https://crawford.anu.edu.au/sites/default/files/2025-04/49a_2024_Bouakez_Kano_Original_June%202024.pdf
Breitenlechner, M., Geiger, M., & Scharler, J. (2024). Monetary policy announcements, consumers’ inflation expectations, and readiness to spend. Macroeconomic Dynamics, 28, 277-298. https://doi.org/10.1017/S1365100523000020
Carotta, G., Mello, M., & Ponce, J. (2023). Monetary policy communication and inflation expectations: New evidence about tone and readability. Latin American Journal of Central Banking, 4(3), 100088. https://doi.org/10.1016/j.latcb.2023.100088
Cioran, Z. (2014). Monetary policy, inflation and the causal relation between the inflation rate and some of the macroeconomic variables. Procedia Economics and Finance, 16, 391-401. https://doi.org/10.1016/S2212-5671(14)00818-1
Coibion, O., & Gorodnichenko, Y. (2025). Inflation, expectations and monetary policy: What have we learned and to what end? National Bureau of Economic Research. https://doi.org/10.3386/w33858
Čaklovica, L., & Efendić, A. (2020). Determinants of inflation in Europe: A dynamic panel. Financial Internet Quarterly, 16(3), 51-79. https://doi.org/10.2478/fiqf-2020-0018
Del Negro, M., & Sims, C. (2015). When does a central bank’s balance sheet require fiscal support? Journal of Monetary Economics, 73, 1-19. https://doi.org/10.1016/j.jmoneco.2015.05.001
Durguti, E., Tmava, Q., Demiri-Kunoviku, F., & Krasniqi, E. (2021). Panel estimating effects of macroeconomic determinants on inflation: Evidence of Western Balkan. Cogent Economics & Finance, 9(1), 1942601. https://doi.org/10.1080/23322039.2021.1942601
Eleftheriou, M., & Kouretas, G. (2023). Monetary policy rules and inflation control in the US. Economic Modelling, 119, 106137. https://doi.org/10.1016/j.econmod.2022.106137
Flaccadoro, M., & Landi, V. N. (2025). Foreign monetary policy and domestic inflation in emerging markets. Journal of International Money and Finance, 159, 103434. https://doi.org/10.1016/j.jimonfin.2025.103434
Gargiulo, V., Matthes, C., & Petrova, K. (2025). Monetary policy across inflation regimes. European Economic Review, 178, 105109. https://doi.org/10.1016/j.euroecorev.2025.105109
Gertler, M., & Karadi, P. (2015). Monetary policy surprises, credit costs, and economic activity. American Economic Journal: Macroeconomics, 7(1), 44-76. http://doi.org/10.1257/mac.20130329
Grabowski, W., Janus, J., & Stawasz-Grabowska, E. (2023). The effects of monetary policy response to the Covid-19 crisis on dynamic connectedness across financial markets in Central and Eastern Europe. Entrepreneurial Business and Economics Review, 11(1), 10-28. https://doi.org/10.15678/EBER.2023.110101
Greene, W. (2012). Econometric Analysis (7th ed.). Prentice Hall.
Hausman, J. A. (1978). Specification tests in econometrics. Econometrica, 46(6), 1251-1271.
Hsiao, C. (2015). Analysis of Panel Data (3rd ed.). Cambridge University Press.
Jakšić, S. (2022). Modelling determinants of inflation in CESEE countries: Global vector autoregressive approach. Review of Economic Perspectives, 22(2), 137 - 169. https://doi.org/10.2478/revecp-2022-0007
Jarociński, M., & Karadi, P. (2020). Deconstructing monetary policy surprises—The role of information shocks. American Economic Journal: Macroeconomics, 12(2), 1-43. https://doi.org/10.1257/mac.20180090
John, J., Kumar, D., & Patra, M. (2022). Monetary policy: Confronting supply-driven inflation. RBI Bulletin, 97-109.
Jørgensen, P., & Ravn, S. (2022). The inflation response to government spending shocks: A fiscal price puzzle? European Economic Review, 141, 103982. https://doi.org/10.1016/j.euroecorev.2021.103982
Keynes, J. M. (1936). The General Theory of Employment, Interest and Money. Macmillan.
Levin, A., Lin, C.-F., & Chu, C.-S. J. (2002). Unit root tests in panel data: asymptotic and finite-sample properties. Journal of Econometrics, 108(1), 1-24. https://doi.org/10.1016/S0304-4076(01)00098-7
Love, I., & Zicchino, L. (2006). Financial development and dynamic investment behavior: Evidence from panel VAR. Quarterly Review of Economics and Finance, 46(2), 190-210. https://doi.org/10.1016/j.qref.2005.11.007
Lukmanova, E., & Rabitsch, K. (2023). Evidence on monetary transmission and the role of imperfect information: Interest rate versus inflation target shocks. European Economic Review, 158, 104557. https://doi.org/10.1016/j.euroecorev.2023.104557
Marcu, Z. (2013). Monetary policy and inflation targeting strategy. SEA - Practical Application of Science, 1(2), 167-173.
Minasyan, G., Ozturk, E., Pinat, M., Wang, M., & Zhu, Z. (2023). Inflation dynamics in the Western Balkans. International monetary fund. https://doi.org/10.5089/9798400235184.001
Obradović, L. (2024). Impact of monetary policy on macroeconomic stability and economic growth. Belgrade: Union University in Belgrade. https://union.edu.rs/sr/dokumenti/repozitorijum/217-lubomir-obradovic
Özer, M., Grubišić, Z., & Küçüksakarya, S. (2023). Effects of exchange rate, output gap, and output gap volatility on inflation volatility in Turkey. Journal of Central Banking Theory and Practice, 12(1), 5-26. https://doi.org/10.2478/jcbtp-2023-0001
Pesaran, M. (2021). General diagnostic tests for cross-sectional dependence in panels. Empirical Economics, 60(1), 13-50. https://doi.org/10.1007/s00181-020-01875-7
Rangarajan, C., & Nachane, D. (2021). Inflation, monetary policy and monetary aggregates. Indian Public Policy Review, 2(3), 1-16. https://doi.org/10.55763/ippr.2021.02.03.001
Roberts, J. (2006). Monetary policy and inflation dynamics. International Journal of Central Banking, 2(3), 193-230.
Salunkhe, B., & Patnaik, A. (2017). The impact of monetary policy on output and inflation in India: A frequency domain analysis. Economic Annals, 62(212), 113-154. https://doi.org/10.2298/EKA1712113S
Shapran, V., & Britchenko, I. (2022). Features of the monetary policy of central banks to combat high inflation. VUZF Review, 7(2), 17-24. https://doi.org/10.38188/2534-9228.22.2.02
Stefanović, Z. (2014). Evolution of "Rules of the game", macroeconomic dynamics and reform policy. Economic themes, 52(4), 491-507. https://doi.org/10.1515/ethemes-2014-0029
Uribe, M. (2022). The Neo-Fisher effect: Econometric evidence from empirical and optimizing models. American Economic Journal: Macroeconomics, 14(3), 133-162. https://doi.org/10.1257/mac.20200060
Vasilić, N., & Veselinović, P. (2024). Exploring the interrelationship between scientific knowledge and economic growth in Serbia: Empirical insights. Economic Analysis, 57(3), 27-37. https://doi.org/10.28934/ea.24.57.3.pp27-37
Velichkovska, K., Mitić, P., & Kojić, M. (2025). Empowering sustainable growth through emerging technologies in Serbia and North Macedonia. Economic Analysis, 58(2), 103-122. https://doi.org/10.28934/ea.10490
Williamson, S. (2018). Inflation control: Do central bankers have It right? Federal Reserve Bank of St. Louis Review, 100(2), 127-150. https://doi.org/10.20955/r.2018.127-50