Modelling inflation in EU accession countries:the case of the Czech Republic, Hungary and Poland.

Abstract

Summary. Inflation in Central and East European countries varied considerably over the transition phase, and econometric relationships between prices, money, wages and exchange rates are said to have been unstable during this period. In order to shed some light on the issue, this paper analyses some empirical models of the inflation process in the three earliest east European transition economies: the Czech Republic, Hungary and Poland. In particular, we first look at inflation within the context of multivariate cointegration, where domestic and foreign price determinants are initially assessed in separate blocks (each single-theory based) in order to obtain a number of longterm attractors. Then, we put previous information in short term simultaneous vector equilibrium correcting models for each country. The importance of theory-based imbalances (attractors) in explaining inflation can be assessed at this stage. Our most significant empirical findings seem to substantiate the idea that many, if not all, theoretical determinants of inflation are of importance in those countries in question: the exchange rate and the output gap would appear to be of particular importance in explaining the phenomenon..