Czech Republic: Selected Issues
Author: International Monetary Fund
Publication Date:
22 May 1998
eISBN:
9781451810011
Language:
English
Keywords:
ISCR; CR; price; interest rate; price deregulation; inflation development; exchange rate change; demand-pull inflation factor; inflation measure; Wages; Labor costs; Import prices; Exchange rate adjustments; wage-price indexation
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This Selected Issues paper examines recent developments in inflation and its key determinants in the Czech Republic, with particular focus on the role of wages. A simple analytical framework is presented that relates inflation to wages, import prices, and money, and the interaction of inflation with these variables is then examined empirically in the context of a vector autoregression model. The findings confirm the critical influence of wages, exchange rate changes, and money growth. The paper also analyzes developments in the public finance.

Abstract

This Selected Issues paper examines recent developments in inflation and its key determinants in the Czech Republic, with particular focus on the role of wages. A simple analytical framework is presented that relates inflation to wages, import prices, and money, and the interaction of inflation with these variables is then examined empirically in the context of a vector autoregression model. The findings confirm the critical influence of wages, exchange rate changes, and money growth. The paper also analyzes developments in the public finance.

II. Inflation and its Determinants in the Czech Republic2

A. Overview

12. Following a sharp increase in the price level after the large devaluation and price liberalization at the outset of the reform process in 1991, inflation in the Czech Republic has persisted at about 9-10 percent a year. The resilience of inflation partly reflects continued price deregulation, although progress in reducing underlying inflation has also been elusive despite the use of the exchange rate as a nominal anchor until early 1997, and generally prudent financial policies. This has been related to the large capital inflows in 1994-95, which complicated monetary management and accommodated wage increases far in excess of productivity growth throughout the period. These wage pressures in turn have resulted from weak corporate governance associated with a slow pace of enterprise restructuring and privatization. Eventually, speculative pressures related to widening macroeconomic imbalances forced the nominal anchor to be abandoned, fueling inflation in the second half of 1997.

13. This chapter examines recent developments in inflation and its key determinants in the Czech Republic, with particular focus on the role of wages. A simple analytical framework is presented that relates inflation to wages, import prices, and money, and the interaction of inflation with these variables is then examined empirically in the context of a vector autoregression (VAR) model. Consistent with previous studies of inflation in transition economies, the findings in this chapter confirm the critical influence of wages, exchange rate changes, and money growth, and point to the need for a tight grip on wage policy, speeding up of enterprise restructuring and privatization, and continued restrained financial policies, if progress is to be made in tackling the resilience of inflation.

B. Ascertaining Developments in Underlying Inflation

14. In analyzing inflation developments in the Czech Republic one would ideally look at “underlying” inflation defined as changes in consumer prices excluding changes in regulated prices and indirect taxes (and potentially also food prices which are more supply determined and volatile), as well as reversible or discrete effects of exchange rate changes. Such an “optimal” measure of inflation would be the best indicator of the stance of macroeconomic policies. However, it is difficult to estimate the effect of changes in the exchange rate on traded goods prices and impractical to focus only on nontraded (and nonregulated) prices, as these are a relatively small share of the consumer price index. One may instead look at “core” inflation, which excludes only the effect of changes in regulated prices and indirect taxes (and potentially food prices). Such a measure could be compared with developments in producer prices as an indicator of changes in nontraded goods prices versus traded goods prices or the real effective exchange rate. Developments in the different price indices during the period 1994-97 are illustrated in Table 1 and Figure 2.

Table 1.

Czech Republic: Developments in Inflation, 1994-97

(In percent)

article image
Sources: Czech National Bank; and staff estimates.
Figure 2
Figure 2

CZECH REPUBLIC: INFLATION DEVELOPMENTS (1995-97)

Citation: IMF Staff Country Reports 1998, 036; 10.5089/9781451810011.002.A002

Sources: Czech authorities.

15. Core inflation (including food prices and broadly corresponding to the Czech National Bank’s new “net” inflation measure)3 remained around 7½ percent in 1995–97 (on an end-of-period basis) following a decline from 10 percent in 1994, while the annual average rate declined from 10 percent to 6½ percent during the period. The tendency for some moderation of core inflation over the period was influenced by a declining trend in food prices, which rose by more than 10 percent in 1995 and by less than 5 percent in 1997. Excluding food prices, core inflation remained around 8 percent on an end-period basis, while the annual average declined by about 2 percentage points, to 7½ percent during 1995–97. However, developments in core inflation were significantly influenced by fluctuations in the exchange rate beginning in mid-1996 and as such were a misleading signal of changes in underlying inflation. Thus, the temporary and—with hindsight—unsustainable appreciation of the exchange rate from mid-1996 to early 1997 led to an exaggerated impression of a decline in underlying inflation when looking at the measure of core inflation, while the completion of the pass-through of the subsequent exchange rate correction resulted in a closer convergence of underlying and core inflation.

16. Producer prices increased somewhat more slowly than core prices, at a rate of 5½ percent to 6 percent a year with the ratio of core prices to producer prices rising at an average rate of around 2 percent a year in 1995–97. However, this underestimates the extent of real appreciation, as core inflation includes traded goods.

17. Developments in overall CPI have reflected continued large adjustments of regulated prices, which were raised at a faster rate than prices of nonregulated goods in recent years.4 Contrary to the declining tendency in core inflation, CPI inflation remained virtually unchanged at an annual average rate of around 9 percent in 1995–97. Year-on-year CPI inflation temporarily declined to 6–7 percent in early 1997 from almost 10 percent in mid-1996, largely owing to delays in the adjustment of administered prices, before climbing back to 10 percent at the end of 1997 following the substantial increase in regulated prices in July 1997, as well as the currency depreciation.5

C. Determinants of Inflation: Wages, Import Prices, and Money

18. Studies of inflation in transition economies have generally focused on a combination of supply or cost-push pressures, demand-pull factors, and structural changes or rigidities.6 The key cost push elements identified were wages and currency depreciations. Wage growth in excess of productivity growth—often attributable to real wage rigidity and weak corporate governance—could explain nontraded goods inflation, but also a rise in traded goods prices faster than world prices (in domestic currency) due to cushions arising from large up-front exchange rate adjustments. At the same time, however, there may also have been considerable scope for reduced profit margins. Currency depreciations have raised the prices of tradables, both directly through imported consumer goods and indirectly through imported intermediate and investment goods. Demand-pull factors have often been related to monetary expansion to finance fiscal deficits, or caused by large, nonsterilized capital inflows. Finally, structural factors have included price deregulation and general supply- and demand-induced relative price changes, which have had an inflationary impact in the presence of downward nominal rigidities.

19. The focus in this section will be on the cost-push side of inflation, with particular emphasis on the role of wages and unit labor costs and, more recently, exchange rate fluctuations, while demand pressures will be proxied by monetary developments, which appear to have been more important for inflation in the Czech Republic than, for example, changes in the stance of fiscal policy.7 The impact of price deregulation is eliminated by focusing on core inflation, and the potential impact of market-induced relative price changes is ignored on the grounds that this factor has probably been less important in recent years.

Wages, Productivity, and Unit Labor Costs

20. Wages in the Czech Republic were subject to controls from the beginning of the transformation process until mid-1995, but the removal of these controls had little immediate effect on wage developments: Nominal wage growth during 1991–96 persisted at 18–20 percent, before declining to an estimated 11–12 percent in 1997. Following a large decline in real wages in 1991 in connection with the jump in the price level, real wages increased rapidly during 1992–94, as wage guidelines typically allowed for nominal wage increases in line with expected inflation plus productivity growth; moreover, they were neither strictly monitored nor enforced. The reason for the removal of the wage controls was not only their perceived ineffectiveness, but also their redundancy as the privatization process was considered more or less completed. However, in reality the state retained direct control over the “strategic” enterprises and indirectly over a large part of the economy through the state-controlled banks. Wage growth continued to be very buoyant in 1995–96, with real wages increasing by around 8 percent a year (Table 2; Figure 3). There was a significant moderation in real wage growth, to around 3 percent in 1997, reflecting the tightening of monetary policy from mid-1996 (see Chapter IV), rising unemployment, a relatively low level of inflation early in the year when most wage contracts were negotiated, and the implementation of a strict incomes policy in the government sector from mid-year.

Table 2.

Czech Republic: Developments in Nominal Wages, 1995–97 1/

(Percent changes)

article image
Sources: Czech Statistical Office; and staff estimates.

Monitored sector of the economy.

Based on shares of the respective sectors in employment in the monitored sector.

Including enterprises with mixed ownership.

Figure 3
Figure 3

CZECH REPUBLIC: ECONOMY-WIDE WAGE, PRODUCTIVITY, AND ULC GROWTH (1995–1997)

Citation: IMF Staff Country Reports 1998, 036; 10.5089/9781451810011.002.A002

Sources; Czech authorities and staff estimates.

21. Average wage growth was somewhat higher in the entrepreneurial sphere than in the budgetary sphere during 1995–97, as higher wage increases in the budgetary sphere in 1996 were more than offset by the slowdown in 1997.8 The relatively large wage increases in the budgetary sector in 1996 reflected, inter alia, the introduction of a fourteenth salary for government workers, while the sharp deceleration in 1997 was partly the result of the abolition of this additional salary. One can interpret these developments as the government attempting to narrow the gap in the wage level with the private sector in 1996, but these large wage increases fueled private sector wage demands the following year. Anecdotal evidence suggests that wage behavior in the budgetary sector has a considerable demonstration effect for the entrepreneurial sector.

22. Within the entrepreneurial sphere, wages rose at a faster rate in state-controlled, and especially state-owned enterprises, than in the private sector, despite the fact that the latter includes foreign-owned companies and joint ventures, which traditionally have granted relatively large wage increases on the basis of higher productivity growth and profitability. This reflects the higher degree of unionization and more widespread existence of collective (sectoral or firm-specific) wage agreements in the state-controlled enterprises, and also the weaker corporate governance as government representatives may have been reluctant to enforce tough wage policies. Wages in industry have evolved more or less in parallel with the entrepreneurial sector in general (Table 3; Figure 4), but with industrial producer prices rising more slowly that consumer prices, real product wages increased by more than 10 percent in 1995–96, before moderating to 6 percent in 1997.

Table 3.

Czech Republic: Developments in Productivity, Wages, and Unit Labor Costs, 1995–97

(Percent change)

article image
Sources: Czech Statistical Office; and staff estimates.

In the monitored sector of the economy.

Figure 4
Figure 4

CZECH REPUBLIC: INDUSTRIAL WAGE, PRODUCTIVITY, AND ULC GROWTH (1995–1997)

Citation: IMF Staff Country Reports 1998, 036; 10.5089/9781451810011.002.A002

Sources: Czech authorities and staff estimates.

23. With the slowdown in economic growth in 1996 and notably 1997 being accompanied by slower employment growth (in 1997 employment contracted), productivity growth in the economy as measured by real GDP per employee remained broadly stable but moderate, at around 3 percent a year. With wages rising much faster as described above, unit labor costs increased at a very high rate of some 14 percent in 1995–96 before moderating to about 9 percent in 1997 on account of the slowdown in wage growth. In the monitored sector of industry (large enterprises), productivity growth based on real gross sales was much more impressive, at approximately 10 percent a year owing to robust sales growth and continued labor shedding. However, such a rate of growth in productivity would not seem to be consistent with economy-wide productivity developments. Also, with real product wages rising at approximately the same rate, it would imply that the share of labor in output had remained broadly stable. This contradicts unpublished data from the Czech Statistical Office, which shows that the share of wages in value added in industry increased from 34.0 percent in 1995 to 37.2 percent in 1996, broadly similar to developments in the overall nonfinancial enterprise sector. An alternative index of physical production shows that final output grew by 2–3 percentage points less than gross sales in 1996–97, but even this measure is likely to overstate value added at constant prices, owing to, inter alia, evidence of increasing reliance on intermediate goods. Thus, productivity growth may have been closer to 6–7 percent and unit labor cost increases about 8–9 percent.

24. As suggested in the discussion above, wage developments are likely to have been affected by changes in monetary and credit conditions as well as the rate of unemployment. Figure 5 traces the relationship between developments in industrial wages, unit labor costs, and money. There would appear to be a positive correlation between wage (unit labor cost) and money growth, seemingly with a short lag from wages to money. Although it is necessary to be very careful with such an interpretation, and it is likely that the direction of the causation may have changed over time, it is consistent with the hypothesis that nominal pressures emanate in the labor market rather than the money market. Figure 6 traces the relationship between nominal wage growth and unemployment.9 As expected, the two variables appear to be negatively correlated, with higher unemployment associated with lower wage increases. This is true both over time and between different regions. For example, in Prague, where unemployment has been virtually nonexistent, wage growth has been much more rapid than in the northern provinces, where unemployment has been high.10

Figure 5
Figure 5

CZECH REPUBLIC: INDUSTRIAL WAGE, ULC, AND MONEY GROWTH (1995–1997)

Citation: IMF Staff Country Reports 1998, 036; 10.5089/9781451810011.002.A002

Sources: Czech authorities.
Figure 6
Figure 6

CZECH REPUBLIC: ECONOMY-WIDE WAGE GROWTH AND UNEMPLOYMENT (1995 - 1997)

Citation: IMF Staff Country Reports 1998, 036; 10.5089/9781451810011.002.A002

Source: Czech authorities.

Import Prices and Money

25. In studying developments in import prices expressed in local currency, one may look at estimates of actual import price indices, or assume that changes in import prices correspond to movements in foreign wholesale prices corrected for exchange rate changes. The latter approach is followed here, as trade price indices are only available on a quarterly basis, but in practice the two are not qualitatively different and the broad orders of magnitude are the same. Import prices were rising very slowly, and at a decelerating rate through mid-1996, against the background of declining U.S. and German inflation and a broadly stable exchange rate for the koruna (Figure 7). From mid-1996, import prices started declining in line with the appreciation of the exchange rate, culminating in early 1997 with import prices down by about 4 percent compared with the year before. Subsequently, import prices shot up as the exchange rate depreciated and reached a level 14 percent higher than the year before by September 1997.11 External developments are discussed in more detail in Chapter VI.

Figure 7
Figure 7

CZECH REPUBLIC: CORE INFLATION, ULC, IMPORT PRICES, AND MONEY GROWTH (1995–1997)

Citation: IMF Staff Country Reports 1998, 036; 10.5089/9781451810011.002.A002

Sources: Czech authorities and staff estimates.

26. The money supply (M2 adjusted) increased at an annual rate of almost 20 percent through mid-1996 before it decelerated quickly, reflecting the tightening of monetary policy. The year-on-year growth rate reached a low in early 1997 of about 6 percent, but picked up slightly to 8–9 percent during the rest of the year. Velocity was broadly stable during the period, with a small decline through mid-1996 offset by a small increase since then, while real income growth slowed in 1996 and especially in 1997. Monetary developments are discussed in more detail in Chapter IV.

27. Figure 7 (top panel) traces the evolution of core inflation, unit labor costs in industry, and import prices. As expected, a positive correlation can be detected between unit labor costs and inflation, with an apparent lag from changes in the growth rate of labor costs to inflation. Also, the figure suggests a rapid and strong spill-over from movements in the exchange rate to inflation. The lower panel compares developments in inflation with broad money growth, but the expected positive correlation is not obvious (although there is some sign of monetary policy accommodation).

D. Empirical Analysis

28. This section presents an econometric study of inflation and its determinants in the Czech Republic. Evidence from earlier studies of inflation in the Czech Republic as well as in other transition economies is presented in Box 1 below. Annex I provides an analytical framework for the empirical model that is being used. In addition to the considerations above, both the empirical evidence from studies of inflation in transition economies and the analytical model based on a simple two-sector model of traded and nontraded goods support the relevance of wage growth, exchange rate changes, and money growth in accounting for inflation.

Empirical Evidence on Inflation in Transition Economies

Empirical studies of inflation in transition economies have typically linked inflation to both cost-push or supply-side variables (notably wages or unit labor costs and import prices) and demand-side variables (typically money). This has generally not been done in a formal way through a careful specification of the underlying economic model and its behavioral relations, but rather in a more ad hoc fashion, examining long-and short-run relationships between the variables, in some cases on the basis of a simple mark-up price-wage model.

In a comprehensive study of inflation in transition economies, Coorey et al. (1996) focus on the role of relative price adjustments. On the basis of a simple two sector model of traded and nontraded goods, they estimate a static, semi-reduced form model linking inflation to past inflation, money growth, unit labor cost developments, real exchange rate changes, and indicators of relative price adjustment. For Eastern and Central European countries, they find that money and wage growth are the most important determinants of inflation and that there is a considerable degree of inflation inertia (elasticities range from 0.2–0.4). On the other hand, real exchange rate changes are less significant, as is the contribution of relative price changes. For the Czech Republic, the authors note that relative price changes were significant in the early part of the transition process, contributing to upward pressures on inflation, as a small number of large relative price increases co-existed with a large number of small price reductions.

The analysis of inflation in Poland in Pujol et al. (1996) similarly focused on the importance of relative price adjustments in its “real sector” story of inflation. The role of wage-price indexation and other structural factors, such as the absence of hard budget constraints on enterprises limiting the effectiveness of monetary policy, was also highlighted. Specifying a standard mark-up price model, with the mark-up dependent on capacity utilization, the authors examine the long-run relationship between inflation, wage growth, and exchange rate changes as well as the short-run dynamics between these variables in a cointegration/error correction framework. The results indicated that consumer price inflation was driven by developments in producer prices, wages (unit labor costs), and exchange rate changes, and that wages responded quickly to changes in prices (and mark-ups to changes in output), while the pass-through of exchange rate adjustments was rather slow. The 1997 paper on recent economic developments stressed the role of a firmer exchange rate policy in reducing inflation since 1995.

For Hungary, van Elkan (1996)—on the basis of an informal discussion of cost-push and demand-pull inflation factors—for the period 1990–95 finds the existence of a long-run (cointegrating) relationship between inflation, wages, money, and the exchange rate in which each explanatory variable has about equal importance and inflation increases at a slightly faster rate than the other nominal variables. Estimation of a short-run, dynamic error correction model indicated that deviations in inflation rates from its long-run path were corrected relatively fast and that changes in the rate of inflation also depended positively on inflation shocks in previous periods (inertia).

Finally, for the Czech Republic during 1991–95, Dayal-Gulati (1996) similarly found a long run, cointegrating relationship between inflation, unit labor costs, money, and import prices, with unit labor costs as the dominant factor. That study did not lend direct support to the hypothesis of monetary accommodation of inflation, but an indirect channel was found through credit expansion. In a more recent study, Holub (1997) focused on the role of exchange rate movements following the widening and subsequent abandonment of the exchange rate band within a VAR framework that also included unit labor costs and money. It was shown that changes in the pace of exchange rate adjustment had a relatively quick impact on inflation, peaking after three months, but that the cumulative pass-through effect was limited to about 25 percent. Causality analysis supported the notion that wages, import prices, and money drive inflation rather than the other way around. One may finally note that the Czech National Bank, in its annual report for 1996, found a stable, cointegrating relationship between inflation and the money supply.

29. The empirical analysis focuses on recent developments in core inflation and the relation to changes in unit labor costs, import prices, and money. The analysis is constrained mainly by the short time period for which data on core inflation are available (since end-1994) and the structural shift in the exchange rate regime during the period. This means that great caution must be exercised in interpreting the empirical results, which are suggestive at best. Rather than estimating the static model suggested in Annex I, we specify—in line with several recent studies—a vector autoregression (VAR) model that allows for the interdependent nature of the variables under consideration and analysis of the dynamic response of the different variables to various shocks:

Δyt=A+Σi=1kBiΔyt−i+∈t,(1)

where yt is a vector of variables [πt, mt, wt, and et with πt, denoting core inflation, mt, growth in broad money, Wt, growth in industrial unit labor costs, and et, changes in import prices; and A and B are vectors (matrices) of coefficients.

30. Determination of the appropriate lag length (k) is fundamental to the VAR analysis. While economic-theoretical considerations would argue for including relatively long lags (e.g. between money/wage growth and inflation), the limited data availability restricts the analysis to a maximum of five lags.12 This lag length is found to be preferable on the basis of different model selection criteria (Akaike, Schwarz). Ideally, one needs to examine the stationarity of the data as well as any potential long run (cointegrating) relationship between the variables; however, such an approach is obviously questionable, given the short time series and general transformation of the economy, including the structural shift in the exchange rate regime. Differencing data to potentially achieve stationarity is associated with a loss of information, and imposing a questionable long-run relationship between variables may bias the short-term analysis. It therefore seems preferable to estimate an unrestricted model in levels (annual growth rates).13 For the sake of completeness, the unit root properties of the data and cointegration tests are examined in Annex II along with the estimation of a vector error correction (VEC) model that takes into account the implied cointegrating nature of the variables.

31. While the parameter estimates of the VAR are by nature difficult to interpret, one may look at the short-run impact of shocks to the different variables in the model in the form of impulse response functions. These trace the effect on current and future values of the endogenous variables of a one standard deviation change in one of the innovations. While the interpretation of innovations is straightforward if these are not correlated, ambiguity arises when this is not the case. A commonly used method of dealing with this problem is to attribute all of the effects of any common component to the variable that comes first in the VAR system (in this case, inflation).14 This is the approach taken here, but one must be cautious in interpreting the impulse response functions, as they will depend on the order of the equations.15

32. With this in mind, the impulse responses to the various innovations in the model suggest the following (Figure 8): Inflation, as expected, responds positively to a wage growth shock, with the maximum impact occurring after 9–10 months and fading out after about one year. Changes in the rate of depreciation have a more immediate, and significant impact on inflation, with the peak materializing after 4–5 months and the shock dissipating after 6–7 months. The pass-through (cumulative impulse response) seems to be about 35 percent. This is consistent with the observation of the impact of the exchange rate appreciation from mid-1996 to early 1997, but it is on the high side judging from the impact of the exchange rate depreciation in 1997.16 This finding might be explained by the weaker demand conditions in mid-late 1997 than in late 1996-early 1997. Finally, a money shock has a small, but steady impact for about eight months. It is also interesting to note—in line with the real wage rigidity hypothesis—that wages respond positively to price innovations, peaking after about 6 months and vanishing after about 10 months, while there is no evidence of any spill-over from faster money growth. Conversely, higher wage growth has a significant and persistent impact on money growth in line with our hypothesis that nominal pressures emanate from the labor market.

Figure 8
Figure 8

CZECH REPUBLIC: IMPULSE RESPONSES IN UNRESTRICTED VAR MODEL

Citation: IMF Staff Country Reports 1998, 036; 10.5089/9781451810011.002.A002

33. The VAR analysis above casts light only indirectly on the nature of the causality between the different variables. As can be seen from Annex II, Table 3, which presents pairwise Granger causality tests, there is some evidence that causality runs from unit labor costs, import prices, and money to inflation, whereas there is no support for the hypothesis of money endogeneity nor—somewhat less intuitively—that inflation causes wage growth. However, part of the reason for the latter finding may be that wages respond to total rather than core inflation. Also, the results suggest that causality runs from wages to money rather than the other way around in line with the findings above. Finally, exchange rate adjustment is Granger-caused by inflation, as one would expect. However, as with the results reported above, the solidity of these findings is not well established.

E. Conclusions

34. The discussion and analysis above have highlighted the importance of wages, exchange rate changes, and money growth for core inflation, as well as the continued impact of regulated price adjustments on consumer price inflation. While the empirical study suffers from a number of shortcomings, they have generally supported the findings in other studies and a number of hypotheses inspired by anecdotal evidence. Thus, a fundamental role in driving inflation is played by wages, including through considerable real wage rigidity and monetary accommodation of wage increases. Changes in the rate of depreciation have an immediate and significant impact on the rate of inflation, although the pass-through effect appears to be rather limited in the presence of tight financial policies. These findings point to the need for a tighter grip on wage policy, speeding up of enterprise restructuring and privatization, and continued financial policy restraint if progress is to be made in tackling the resilient nature of inflation in the Czech Republic.

References

  • Agenor, P. and A.W. Hoffmaister (1997): “Money, Wages, and Inflation in Middle-Income Countries”, IMF Working Paper 97/174, December 1997.

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  • Coorey, S., M. Mecagni and E. Offerdal (1996): “Disinflation in Transition Economies: The Role of Relative Prive Adjustment”, IMF Working Paper 96/138, December 1996.

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  • Cottarelli, C. and G. Szapary (eds.) (forthcoming): “Moderate Inflation: The Experience of Central and Eastern Transistion Economies”, IMF and National Bank of Hungary.

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  • Czech National Bank: Annual Report 1995 and 1996.

  • Dayal-Gulati, A. (1996): “Inflation in the Czech Republic”, in “Czech Republic-Recent Economic Developments,” IMF, November 1996 (SM/96/286).

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  • Holub, Tomas (1997): “Inflation in the Czech Republic,” Komercni Banka, October 1997.

  • Pujol, T. and M. Griffiths (1996): “Moderate Inflation in Poland: A Real Sector Story,” IMF Working Paper 95/57, June 1996.

  • Ramaswamy, R. and T. Sloek (1997): “The Real Effects of Monetary Policy in the European Union: What are the Differences?”, IMF Working Paper 97/160, December 1997.

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  • van Elkan, R. (1996): “Inflation Inertia in Hungary,” in “Hungary: Selected Issues”, IMF, August 1996 (SM/96/207).

2

Prepared by Thomas Laursen.

3

In the early years of the transition, there was a catch-up phase for food prices as the Government’s agricultural policies were liberalized. While food prices continue to show considerable volatility, prices are now closer to market levels.

4

The weight of administratively set prices in the consumer basket is about 15 percent, and another 5 percent or so consists of goods subject to “substance-based” price regulation. The former group comprises natural gas (1.1 percent), electricity (2.8 percent), central heating for consumers (3.6 percent), tele- and radio communication (0.8 percent), railroad passenger tariffs (0.3 percent), rents in non-cooperative apartments (2.6 percent), and health related goods and services (3.7 percent). Substance-based price regulation covers water, central heating for producers, bus passenger tariffs and urban public transport, and postal tariffs.

5

Maximum consumer prices on central heating were raised by 39 percent and on gas and electricity by 15 percent while rents in non-cooperative apartments were raised an average of 50 percent in July contributing a total of 3.2 percentage points to the inflation rate for that month. Other significant price increases included postal tariffs (28 percent) in April and railroad passenger tariffs (33 percent) in September 1997.

7

In the long run one would of course expect a close relationship between money and inflation on the basis of the quantity theory, while velocity can be unstable in the short run.

8

In addition to private and foreign owned firms, the entrepreneurial sphere includes state-continued…) owned enterprises and enterprises of mixed ownership (not necessarily with state control, although this is likely to be the case in most instances given the diffuse ownership structure and the fact that state-controlled banks control the largest investment funds that in turn manage most of the shares from the voucher privatization scheme).

9

The Phillips curve in Figure 6 is based on pooled time series and cross-section data from the different regions in the Czech Republic.

10

In the first half of 1997, wage growth in Prague was 16 percent and unemployment less than 1 percent, while in Moravia wages increased less than 9 percent while unemployment was close to 7 percent.

11

This may overestimate the increase in import prices due to switching and discounting (estimated import prices based on trade data were up about 8 percent in September.

12

The model is estimated using monthly data (year-on-year growth rates) for the period 1994:12 to 1997:09. Data on core inflation is obtained from the CNB, while unit labor costs are estimated on the basis of industry data from the CSO. Import prices are proxied by U.S. and German wholesale prices and changes in the basket exchange rate.

13

This was also the approach adopted by Ramaswamy et al. (1997) in their analysis of monetary policy shocks in the EU.

14

More technically, the errors are orthogonalized by a Cholesky decomposition so that the covariance matrix of the resulting innovations is diagonal.

15

Alternative methods of identifying the structural shocks are discussed in e.g. Ramaswamy et al. (1997). Agenor et al. (1997) adopts a recently developed generalized VAR approach to overcome this problem in their study of inflation in middle income countries.

16

It is also somewhat higher than reported by Holub (1997), who found a pass-through of about 25 percent.

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Cover IMF Staff Country Reports
Czech Republic: Selected Issues
Author: International Monetary Fund
Volume/Issue:
Volume 1998: Issue 036
Publisher:
International Monetary Fund
ISBN:
9781451810011
ISSN:
1934-7685
Pages:
158
DOI:
https://doi.org/10.5089/9781451810011.002
  • View in gallery

    CZECH REPUBLIC: INFLATION DEVELOPMENTS (1995-97)

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    CZECH REPUBLIC: ECONOMY-WIDE WAGE, PRODUCTIVITY, AND ULC GROWTH (1995–1997)

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    CZECH REPUBLIC: INDUSTRIAL WAGE, PRODUCTIVITY, AND ULC GROWTH (1995–1997)

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    CZECH REPUBLIC: INDUSTRIAL WAGE, ULC, AND MONEY GROWTH (1995–1997)

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    CZECH REPUBLIC: ECONOMY-WIDE WAGE GROWTH AND UNEMPLOYMENT (1995 - 1997)

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    CZECH REPUBLIC: CORE INFLATION, ULC, IMPORT PRICES, AND MONEY GROWTH (1995–1997)

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    CZECH REPUBLIC: IMPULSE RESPONSES IN UNRESTRICTED VAR MODEL

CZECH REPUBLIC: INFLATION DEVELOPMENTS (1995-97)

CZECH REPUBLIC: ECONOMY-WIDE WAGE, PRODUCTIVITY, AND ULC GROWTH (1995–1997)

CZECH REPUBLIC: INDUSTRIAL WAGE, PRODUCTIVITY, AND ULC GROWTH (1995–1997)

CZECH REPUBLIC: INDUSTRIAL WAGE, ULC, AND MONEY GROWTH (1995–1997)

CZECH REPUBLIC: ECONOMY-WIDE WAGE GROWTH AND UNEMPLOYMENT (1995 - 1997)

CZECH REPUBLIC: CORE INFLATION, ULC, IMPORT PRICES, AND MONEY GROWTH (1995–1997)

CZECH REPUBLIC: IMPULSE RESPONSES IN UNRESTRICTED VAR MODEL