Keywords

price level, convergence, Balassa-Samuelson effect, transition

This paper analyses changes in price levels and real income in European countries on the basis of data from the International Comparison Project (ICP) and estimates the potential pressures on prices ensuing from the convergence process. Regression results for determinants of price levels indicate the importance of the Balassa-Samuelson effect for an explanation of observed differences in price levels across countries. A particular emphasis is put on the position of Croatia in international comparisons by using disaggregated data collected within the ICP. The paper suggests that a relatively high level of Croatian prices could be an advantage in the EU integration process due to lesser needs for future corrections of the exchange rate and prices. The presented regression estimate of factors of price level convergence indicates that over the next  few years Croatia, among all European transition countries, may experience the least upward pressure on the general price level.