Wage Rigidity, Exchange Rate Regimes, and Inflation Persistence in Transition Economies: A Cohort-Based Institutional Approach

TL;DR

This study examines how institutional rigidities, especially wage and exchange rate regime rigidities, influence inflation persistence in transition economies using a cohort-based, AI-assisted analysis of legal texts and macroeconomic data.

Contribution

It introduces a novel cohort-based empirical approach combining AI-derived institutional indices with macroeconomic analysis to understand inflation dynamics in transition economies.

Findings

Both wage rigidity and exchange rate regime rigidity tend to reduce inflation persistence.

Exchange rate regime rigidity has a particularly strong and robust effect on dampening inflation persistence.

Wage rigidity's impact on inflation persistence is more sensitive to measurement assumptions.

Abstract

This paper investigates how institutional rigidities shape inflation persistence in transition economies, focusing on labor market institutions and exchange rate regimes. Using a large panel of transition countries over the period 2013-2024, the analysis combines newly constructed indices of wage rigidity and labor protection, derived from AI-assisted coding of legal texts, with de facto measures of exchange rate regime rigidity and standard macroeconomic controls. The empirical strategy adopts a dynamic panel framework in which inflation persistence is conditioned on institutional characteristics through interaction terms, estimated using GMM techniques. Identification follows a cohort-based approach, comparing inflation dynamics across countries with different institutional configurations. To address potential measurement and classification uncertainty in institutional variables, the analysis incorporates a simulation-based sensitivity framework. The results show that inflation persistence varies systematically across institutional settings. Both wage rigidity and exchange rate regime rigidity tend to dampen inflation persistence, indicating that institutional constraints can weaken the transmission of past inflation into current price dynamics. This effect is particularly strong and robust for exchange rate regimes, while the effect of wage rigidity is more sensitive to measurement assumptions. Findings highlight the importance of institutional structures in shaping inflation processes and suggest that nominal rigidities may play a stabilizing role in certain macroeconomic environments.