Macroeconomic Regimes and Changing Cost Structures in Central and Eastern Europe

Abstract

This paper explores the relationship between macroeconomic regimes and the intensity of change in cost structures in Central and Eastern Europe (CEE). Change in the cost structure may be considered as a structural factor, with a potential to strongly affect macroeconomic policy and vice versa. Macroeconomic policies should take into account the intensity of change in cost structures and its effects on the tightness of the macroeconomic regime. Similar macroeconomic polices have different sectoral (industry) and overall growth effects. A successful macroeconomic policy handles both the underlying industry structure and the intensity of changes in costs. An analysis of the relationship between industry cost structures and macroeconomic regimes in five CEE countries shows that i) cost structures are more homogenous within industries than within countries; ii) changes in cost structures are dominantly intra-industry, i.e. unrelated to changes in industry structures, though in some countries structural and specialisation effects were also found to be significant. Linking the intensity of changes in industry cost structures with a composite measure of macroeconomic stability, the paper identifies a country-specific relationship between changes in costs and macroeconomic stability. Based on these findings, arguments are provided for the integration of macroeconomic and industrial (technology) policies.