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Analysis and estimation of Eurochangeover effect on the price development in Slovakia

Analysis and estimation of Eurochangeover effect on the price development in Slovakia. Ján Haluška Institute of Informatics and Statistics (INFOSTAT) Bratislava František Bernadič Statistical Office of the Slovak Republic (SO SR) Bratislava. Content. Introductory remark s

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Analysis and estimation of Eurochangeover effect on the price development in Slovakia

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  1. Analysis and estimation of Eurochangeover effect on the price development in Slovakia Ján Haluška Institute of Informatics and Statistics (INFOSTAT) Bratislava František Bernadič Statistical Office of the Slovak Republic (SO SR) Bratislava

  2. Content • Introductory remarks • Inflation in Slovakia • Methodology of price analysis before Euro adoption -estimation ofpre-changeover effect • analysis before setting conversion rate • analysis after setting conversion rate • Methodology of price analysis after Euro adoption -estimation of net-changeover and post-changeover effects • Conclusion

  3. Introductory remarks • November 2005- entering SKK into ERM II with central parity corresponding to market exchange rate 38.4550 SKK/EUR • July 2003- the government and the National Bank of Slovakia (NBS) adopted the Strategy of Euro Adoption • July 2005- the government adopted the National Plan of Euro Adoption • March 2007- new central parity of 35.4424 SKK/EURapproved

  4. Introductory remarks • May 2008- new central parityof30.1260 SKK/EUR approved which was declared for conversion rate on 8th July 2008 • 8th July 2008- central paritydeclared for conversion rate • 1st January 2009- the Slovak Republic has become the 16th Euro-zone member country

  5. Introductory remarks Maastrichtcriteriafulfilment:

  6. Inflation in Slovakia

  7. Structure of consumer basket in Slovakia

  8. Methodology of price analysis before Euro adoption – estimation of pre-changeover effect • pre-analysis based on monthlytime series of CPI in form of chain indices covering the period 2005-2008 • every month of analysed period consumer basket divided into three different groups of CPI representing items with • growing prices (CPI>100) • not changing prices (CPI=100) • falling prices (CPI<100)

  9. Methodology of price analysis before Euro adoption – estimation of pre-changeover effect • relative shares of individual groups on total number of items in consumer basket calculated for every month of analysed period • consumer basket checked for stability of relative shares during analysed period • structure of consumer basket relatively stable, but only by September 2007 • since September 2007 share of growing prices went up mainly at the expense of share of falling prices

  10. Methodology of price analysis before Euro adoption – estimation of pre-changeover effect • pre-conclusion - instability of relative shares in 2008 can be attributed to some extend to an impact of Euro introductionbecause: • share of items with growing prices was almost the whole year above its long term average from the period 2005-2008 • moreover, share of items with growing prices increased extraordinary sharply immediately after setting conversion rate, i.e. when introduction of Euro changed from a potential possibility to the sureness

  11. Methodology of price analysis before Euro adoption – estimation of pre-changeover effect • goal of the analysis-to detect whether CPI - in form offixed base indices - show signs of stronger acceleration before setting conversion rate (in 1st half 2008)or after settingconversion rate(in 2nd half 2008) with respect to dynamics of their growth in comparable periods of previous three years • estimation of pre-changeover effect based on analysis of time series properties of CPI • CPI aggregated according to divisions of COICOP (12) and groups of COICOP (44)

  12. Methodology of price analysis before Euro adoption – estimation of pre-changeover effect • average value and standard deviation for the period from January 2005 to December 2007 computed for CPIof given 12 divisions and 24 groups • CPI for January 2008, February 2008 etc. compared to the averages • CPI regarded as unusual (i.e. not following expected inflation patterns) if they are more than 3 standard deviations away from computed average - identification based on the rule of "three sigma" known from normal distribution

  13. Methodology of price analysis before Euro adoption – estimation of pre-changeover effect • applying the rule of "three sigma" three divisions of COICOP and three groups of COICOP identified as "suspicious"i.e. their price development does not follow expected inflation patterns since January 2008 • food and non-alcoholic beverages (01), transport (07) and hotels, cafes and restaurants (11) • food (011), transport services (073) and catering services (111)

  14. Methodology of price analysis before Euro adoption – estimation of pre-changeover effect • not all detected divergences of CPI from their expected patterns can be attributed to the euro changeover • divergence of some CPI might be a result of seasonal effects, external and/or internal factors (price deregulation) • in Slovakia prices of food and non-alcoholic beverages started to accelerate already in September 2007 • food prices accelerated in many other countries not only in Slovakia

  15. Methodology of price analysis before Euro adoption – estimation of pre-changeover effect • comparative analysis of price development in Slovakia with price development in "relevant geographical environment" in 2008 based on HICP provided important information with respect to estimation of pre-changeover effect • HICP of food and non-alcoholic beverages (01), transport services (073) and catering services (111) for Slovakia (sk) compared with identical HICP for EU27 (eu), EMU15 (ea), Czech Republic (cz), Austria (at), Poland (pl) and Slovenia (si)

  16. Methodology of price analysis before Euro adoption – estimation of pre-changeover effect • conclusion - acceleration of consumer prices in 2008 can be in Slovakia attributed to some extend to an impact of Euro implementation • in 1st half of 2008 prices of food and non-alcoholic beverages (01) increased much more in Slovakia than abroad • in 2nd half of 2008 prices of transport services (073) as well as prices of catering services (111) increased much more in Slovakia than abroad

  17. Methodology of price analysis before Euro adoption – estimation of pre-changeover effect Inflation, average

  18. Methodology of price analysis before Euro adoption – estimation of pre-changeover effect • in 2008 average inflation increased in Slovakia by 0.90 p.p. more than in EMU15 • however, in Slovakia regulated prices increased by 4.91% in 2008 (in average) i.e. by 2.89 p.p. more than in 2007 and their share in consumer basket was 27.31% in 2008 • in Slovakia contribution of regulated prices to increase of average inflation was 0.79 p.p. in 2008 (2.89 x 0.2731 = 0.79) • pre-changeover effect is estimated at 0.11 p.p. (0.90 - 0.79 = 0.11) in 2008 as a minimum

  19. Methodology of price analysis after Euro adoption – estimation of net-changeover and post-changeover effects • estimation of net-changeover and post-changeover effects based on analysis of time series properties of CPI • in January 2009 consumer prices in Slovakia increased by 0.40% on monthly basis - the lowest increase in January since 1993 • inflation in Slovakia declined significantly on yearly basisfrom 4.4% in December 2008 to 3.4% in January 2009 (if measured by CPI) or from 3.5% to 2.7% in the same period (if measured by HICP) • in broader context fall of inflation since the beginning of 2009 can be attributed to global financial and economic crisis

  20. Methodology of price analysis after Euro adoption – estimation of net-changeover and post-changeover effects • applying the rule of "three sigma" neither any division of COICOP nor any group of COICOP identified as "suspicious" i.e. their price development follow expected inflation patterns in January 2009 • divergences of CPI from their expected patterns detected for 17 individual items of consumer basket • net-changeover effect reflects price changes of 17 individual items in January 2009 vs December 2008 and their weights in consumer basket • net-changeover effect is estimated at 0.12 p.p. in January 2009

  21. Methodology of price analysis after Euro adoption – estimation of net-changeover and post-changeover effects • in April 2009 consumer prices in Slovakia increased cumulatively by 0.20% vs December 2008 - the lowest increase over the period of January - April since 1993 • applying the rule of "three sigma" no individual item of consumer basket identified as "suspicious" i.e. their price development follow expected inflation patterns over the period of February - April 2009 • Euro adoption did not generate any post-changeover effect in Slovakia over the period of February - April 2009

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