External and Domestic Drivers of Inflation: The Case Study of Hungary

Abstract

Subdued global economic activity, declining energy and commodity prices, the appearance of new technological innovations and inflation expectations anchored at historically low levels around the world were all factors that have tended to result in declining inflation rates at the global level since 2013. The relationship between globalization and inflation is a popular research topic among economists. According to the majority of the body of literature, globalization’s and external factors’ influence on national inflation rates increased in recent years. In this paper we investigate, how external and domestic drivers affect the Hungarian inflation. Hungary is an interesting case study, since openness of the country grew significantly, thus Hungary became one of the most open economy in the EU. The Hungarian experience can thus be interesting for countries with an increasing trend of openness. Using several statistical methods, we examined and analyzed the impact of external and domestic drivers of the Hungarian inflation, and how these external factors varied in time and how their effect on the domestic inflation has changed. Our results show, that the role of external factors in domestic inflation developments strengthened in the past period, and especially after 2012, the changes in inflation in Hungary were mainly influenced by external effects.