Inflation In Poland Research Articles

Modelling Inflation Using Markov Switching Models: Case of Poland, 1992-2005

We investigate inflation in Poland in the period of economic transition by examining the potential application of Markov Switching Models to model the inflation generating process in Poland. The time horizon of analysis was limited to the period between March 1992 and October 2005 defined as the process of disinflation, i.e. the process of continued decrease in inflation rates following the economic transition period in early 1990s which was accompanied by a high level of inflation. According to the Ball-Friedman hypothesis, variation of inflation during periods of high inflation can be unstable. Indeed, the results show that non-linear models significantly improve the description of inflation generating process in Poland. Apart from univariate Markov Models, we also use a model that incorporates inflation expectations measured by Future Inflation Indicator (FII). We find that the model, where lagged values of FII are included as exogenous variables is significantly better in modelling inflation than simple univariate Markov Model.

Various Measures of Underlying Inflation in Poland 1995 - 98

As inflation targeting gains popularity policy makers, monetary authorities seek to design a measure of inflation that would be a good indicator of fundamental demand-driven price movements, i.e. the underlying or core rate of inflation. It is widely acknowledged that the Consumer Price Index (which is the simple weighted average of price changes of the set of goods and services comprising the consumers' expenditure basket) is a rather deficient indicator of the 'trend' inflation as it is highly volatile, seasonal and contains a lot of noise. The ideal measure of core inflation should account for the long-term trend movements in prices that reflect the state of demand in the economy and discard various one-off shocks coming from supply side. The paper presents 4 alternative methods of calculating the core inflation most commonly found in the literature: trimmed mean, sample mean percentile, standard deviation trimmed mean and exclusion mean. Using Polish price data from the period 1995:1-1998:7, each measure is calculated at monthly, quarterly and annual frequencies and compared to the 24-month centered moving average .of the CPI which is assumed to be the benchmark core inflation. Root mean square error (RMSE) and mean absolute deviation (MAD) of the candidate measure and the benchmark were chosen to be the criteria for choosing the optimal definition - both within each of the 4 groups and across them. Rather surprisingly, crude methods based on exclusion yielded the best results. Volatility-based exclusion proved most efficient for monthly and quarterly series, whereas excluding broad aggregates (food and energy) turned out optimal for annual series. The paper concludes with highlighting the caveats and fragility of the results as well as stressing the necessity of further research.

Selecting Inflation Indicators Under an Inflation Targeting Regime: Evidence from the MCL Method

This paper seeks to fill a gap in the literature by analyzing inflation in Poland, one of only two transition economies that have adopted a strict inflation-targeting policy. The paper also introduces a new method for selecting inflation indicators. Consistent with the earlier literature, empirical results find a strong link between the producer price index and consumer price index in Poland. This shows the importance of the manufacturing sector in determining the price level in the country. Overall, wages, broad money supply and the exchange rate are good indicators of inflation.

Inflation in Poland: How Much Can Globalization Explain?

This paper analyses how globalization has affected inflation in the New EU Members States (NMS), and Poland in particular, since 1995. It finds prices have become less sensitive to domestic economic conditions as trade integration rose, possibly because monetary policy incentives increasingly shifted toward meeting price stability objectives. Quantitatively, globalization appears to have lowered Polish prices by ½ to 1 percentage point annually since 1995, substantially more than in advanced economies. However, future inflation-dampening effects in the NMS are likely to be smaller as the pace of increases in trade openness moderates.

Inflation in Poland: How Much Can Globalization Explain?

This paper analyses how globalization has affected inflation in the New EU Members States (NMS), and Poland in particular, since 1995. It finds prices have become less sensitive to domestic economic conditions as trade integration rose, possibly because monetary policy incentives increasingly shifted toward meeting price stability objectives. Quantitatively, globalization appears to have lowered Polish prices by ½ to 1 percentage point annually since 1995, substantially more than in advanced economies. However, future inflation-dampening effects in the NMS are likely to be smaller as the pace of increases in trade openness moderates.

Diagnosing and Predicting Inflation in Poland with Application of Markov Switching Models and Future Inflation Indicator

In the article authors start from investigating the inflation process in Poland during the transition period. Afterwards the potential application of Markov Switching Models to explain the inflation generating process in Poland is examined. The interval of analysis was limited to the period between March 1992 and October 2005. The application of non-linear models is a consequence of the transition period connected with high level of inflation. According to the BallFriedman hypothesis variation of inflation during such periods can be highly unstable. The results show that non-linear models significantly improve the description of inflation generating process in Poland. In the analysis were included not only univariate Markov Models, but also such a model that incorporates leading information included in Future Inflation Indicator (FII). The most significant result of the research is that the model, where lagged values of FII are included as exogenous variables is significantly better in modeling inflation than univariate Markov Model.

Modeling inflation in Poland

The paper presents two different, aggregate models of inflation. The first is specified entirely in growth rates and thus excludes the long run effects. However, it allows for the analysis of turning points (shifts). The verification of the hypothesis of the threshold effect of prices led to endogenous switching model which was estimated by Bayesian methods. The second model has the VAR structure and was meant to identify the long-run relationships between wages, prices, labor productivity, and unemployment. It was estimated and analyzed by the Johansen method. Moreover, identifying restrictions were introduced which helped to obtain fully economically interpreted system of equations (SVAR). The empirical investigation is based on the Polish quarterly data covering the period from 1991 to 1996.

Effects of inflation on the subjective value of delayed and probabilistic rewards

In the years prior to 1994, there were very high rates of inflation in Poland, and the zloty depreciated relative to the U.S. dollar. However, the new zloty, introduced in 1995, was associated with greatly decreased rates of inflation and provided a more stable currency. We report a series of three experiments that take advantage of these changes to examine the effects of inflation on the subjective value of delayed and probabilistic rewards. Subjects were Polish citizens familiar with both zlotys and dollars. The first two experiments, conducted in 1994, used dollars and old zlotys, and the third experiment, conducted in 1996, used dollars and new zlotys. In all three experiments, the dollar and zloty rewards were of equivalent worth, according to the then current exchange rates. In Experiment 1, subjects chose between immediate and delayed rewards and, in Experiment 2, chose between certain and probabilistic rewards. The subjective value of a delayed reward was greater when its amount was specified in dollars than when it was specified in old zlotys. In contrast, the currency in which a reward was specified had no effect on the subjective value of probabilistic rewards. The results of these two experiments suggest a selective effect of inflation on decisions involving delayed rewards. This was verified in the third experiment, in which, using new zlotys, no differences in discounting were observed between the two currencies with either probabilistic or delayed rewards. Importantly, in all three experiments, the discounting of both delayed and probabilistic rewards was well described by the same simple mathematical model, suggesting that similar decision-making processes underlie both phenomena. However, the present results argue against a single-process theory in which the discounting of probabilistic rewards is derived from the discounting of delayed rewards.

Relative Prices and Inflation in Poland 1989-1997

The paper is organized as follows: Section 2 discusses briefly two main groups of theories that link inflation and relative price variability and provides a sketch of a survey of the literature. Section 3 takes on Ball and Mankiw's models predicting the causality from relative price variability to inflation and discusses it in more detail. Section 4 provides a brief background of the factors underlying Polish relative price variability and empirical evidence on relative price behavior in Poland. The theoretical model as well as obtained regression results are discussed in section 5. Section 6 takes a closer look at relative price changes on a cumulative basis and section 7 introduces the Cukierman and Leiderman model of price controls with its policy-related implications. Finally, section 8 concludes with a summary of results, conclusions and a sketch of possible policy recommendation.

Reply to E. Dirksen, "The Control of Inflation? Errors in the Interpretation of CPE Data"

Mr Dirksen is trying to make a meal out of rather little, in the manner of cuisine minceur. But the raw materials are skimpy and not top quality, and the result is not to my taste. Particularly unpalatable is the thin sauce of not to say disingenuous, language, liberally applied. I simply cannot have made errors in the interpretation of CPE data that were unavailable at the time I wrote (1976). Even had I thought the Holzman index sufficiently important to try myself to extend it beyond the 1971 figure for the USSR given by Garvy, I could at best have gone through 1974, and (pace Dirksen) the conclusion would have been unchanged. My omission of Soviet CFM prices after 1971 could not have been seriously misleading, since they rose at only 2 per cent per annum in 1971-1974. Nor could my of a continuously falling Holzman be wrong for the period since 1971, since I painted no such picture even for the period 1955-1971 (though it would on the whole be correct) and, having no data, I ignored this indicator's behaviour after 1971. reader without my 1977 paper at hand may now be wondering what I did say on this topic and may indeed be surprised to know that its 19 pages contain only one sentence referring to the CFM and Holzman index data: Tables 4 and 5, moreover, need no interpretation at all to be this view (p. 120). What view? The hypothesis that the planners have in fact maintained macroeconomic equilibrium on the consumption goods market for all but a few brief periods during the past two decades (1955-75).. .. I had based this hypothesis on a wide range of arguments and data, then stated that it was also consistent with the econometric evidence that David Winter and I had so far accumulated. Only then did the sentence quoted above cite the CFM prices for Hungary and Poland 1955-1975 and the Holzman index for the USSR 1955-1971, and the following sentence concluded, Thus we must remain agnostic on this issue . . .. Incidentally, I gave such little weight to the evidence from CFM prices because the theoretical basis for using their relation to state retail prices (i.e., the Holzman index) as an indicator of excess aggregate demand is very weak (e.g., see Pickersgill, 1977, cited by Dirksen). It was precisely the intention of my paper, which Mr Dirksen misinterprets, to direct attention towards macroeconomic arguments and evidence. It is also tendentious to say I admit things that one might just as well have said I claimed. So the 4 per cent open inflation and some repressed inflation in Poland in the early 1970s (p. 1 10), the latter being confirmed by our disequilibrium estimates (Portes and Winter, 1980). Again, our 1978 paper didn't admit, but rather argued at some length, that disequilibrium estimation was essential to test properly the hypothesis stated above.