Fiscal and monetary drivers of inflation in the European Union: A comparative analysis of old and post-socialist countries

Abstract This study analyses the fiscal and monetary determinants of inflation in 27 European Union (EU) member states between 2010 and 2023, with a comparative focus on “old” (primarily Western European) and “post-socialist” (mostly Eastern European) members. A dynamic panel estimation based on the System Generalised Method of Moments (System GMM) is employed to address endogeneity and unobserved heterogeneity. Key macroeconomic variables considered include wages, unemployment, interest rates, exchange rates, government spending, tax revenues, trade openness, and government debt growth. The findings show stronger inflation persistence in post-socialist members, while wages exert greater upward pressure on prices in older members. Unemployment displays a weaker inverse link with inflation in older EU countries, whereas government spending exhibits a negative association with inflation, suggesting that fiscal tightening is not uniformly disinflationary. Tax revenues, meanwhile, have a positive but insignificant effect. The results also indicate that exchange rate depreciation drives higher inflation in post-socialist members, while higher interest rates reduce inflation across both groups. The contribution of this paper lies in its comparative analysis of old and post-socialist EU members, its incorporation of inflation persistence, and the application of a robust dynamic specification. The evidence suggests that tailored rather than uniform policy measures are required to safeguard price stability and support sustainable growth across the EU.