Abstract
This paper investigates patterns of regional inflation persistence in Poland, a representative Central and Eastern European (C.E.E.) country. This study first argues that the C.E.E. perspective is relevant in the context of this study, due to the recent transitions, incomplete processes of forming forward-looking inflation expectations and pronounced spatial inequalities. Using individual and panel regressions on disaggregate data, this study provides evidence of the aggregation bias and marked differences in inflation persistence across product categories. Furthermore, it shows that cross-regional differences in inflation persistence remain, even after controlling for the product category. While this study generally confirms the earlier finding of Vaona and Ascari that more backward regions exhibit higher consumer price index inflation persistence, we also show that the picture is more nuanced at the product category level.
Highlights
IntroductionInflation persistence is often defined as the extent to which shocks in the past have an effect on current inflation (Fuhrer & Moore, 1995)
While this study generally confirms the earlier finding of Vaona and Ascari that more backward regions exhibit higher consumer price index inflation persistence, we show that the picture is more nuanced at the product category level
Inflation persistence is often defined as the extent to which shocks in the past have an effect on current inflation (Fuhrer & Moore, 1995)
Summary
Inflation persistence is often defined as the extent to which shocks in the past have an effect on current inflation (Fuhrer & Moore, 1995). Understanding how shocks that have affected inflation in the distant past are reflected in current inflation, as well as how long it takes for inflation to approach a new equilibrium after a shock, is crucial for a central bank in determining its response in order to reach the desired objectives (Ascari & Sbordone, 2014) It comes as no surprise that inflation persistence has attracted considerable research interest around the world, manifested in the works of Steinsson (2003), Benigno and Lopez-Salido (2006) or Stock and Watson (2007), to name just a few of many. In an excellent survey, Cecchetti and Debelle (2006) show that canonical versions of time-dependent and state-dependent price-setting models predict no inflation persistence, while the limited information models typically introduce only a small amount of it. In time-dependent models, such as those proposed by Taylor (1980) or Calvo (1983), prices are determined in a sequence of overlapping
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