Money and Prices in the Polish Economy. Seasonal Cointegration Approach.

Abstract

The paper contains an analysis of the long run causality behaviour between the money and the prices in the Polish economy during the transition period. This study has been conducted upon application of the monetary inflation model known as the P-star model, which was first developed by the FED economists at the end of 80-ties. The conclusions on existence of the long run relationship between the money supply and the price level have been turned out of the cointegration analysis. This analysis allows concluding about the presence of the long run equilibrium relationship (cointegrating relationship) between the variables being in a steady state. In the paper this equilibrium relationship follows the long run money demand function. The research on the relationship between money and prices in the Polish economy carried out to date indicates that some covered variables (GDP, prices) show an irregular seasonal pattern. For this reason we proposed the generalisation of the cointegration concept to analyse the long run relationship between money and prices in the Polish economy. This generalisation is known as the seasonal cointegration and it has been developed in the seminar work of Hylleberg, Engle, Granger and You in the beginning of 90-ties. The main hypothesis has been verified positively. The results of the research impose conclusions that there exists a long-run causality relationship between money and prices (long-run cointegration relationship), which follows the assumptions of the P-star inflation model. Nevertheless the results of this part of the research, which come out of the analysis of the seasonal cointegrating relationships, indicate that there are no seasonal cointegrating relationships in the P-star inflation model, which can be interpreted as the money demand equations. This means that the quality of the inflation forecasts cannot be improved by the application of the additional seasonal cointegrating relationships to this model.