Inflation synchronization and shock transmission between the eurozone and the non-euro CEE Economies: A wavelet quantile VAR approach

Abstract

This work examines inflation spillover between non-euro Central and Eastern European countries (CEE) and the euro area using a novel procedure that combines the benefits of the wavelet methodology with the parametric quantile VAR estimation. The proposed procedure allows us to estimate the level of inflation spillover within the network of countries under consideration at different time scales and across different inflation regimes. The empirical analysis reveals a high level of inflation spillover within the network of countries under consideration, with the euro area being the main shock transmitter. However, the spillover level varies across inflation quantiles. The estimation results suggest that during a high inflation regime, the level of spillover across the network is much higher than in spillover during normal inflation regimes. Also, it is found that large shocks do not propagate in the same way as smaller shocks do.