Convergence-driven inflation and the channels of its absorption

Convergence-driven inflation is an important issue from the perspective of catching-up economies, especially those within a heterogeneous monetary union. This study contributes to the existing literature by analysing the role of the labour and product markets in mitigating inflationary pressure stemming from the catching-up process. It is demonstrated that disregarding the developments of sectoral wages and mark-ups severely distorts the estimates of the convergence-driven inflation. The empirical results obtained for the Czech Republic, Hungary, Poland and Slovakia provide a basis for assessing the risk of common monetary policy in the euro area being inadequate for their economies.