Ball, Lawrence and N. Gregory Mankiw, 1995, “Relative Price Changes as Aggregate Supply Shocks,” The Quarterly Journal of Economics, Vol. CX, Issue No. 1.
Bryan, Michael, Stephen Cecchetti, and Rodney Wiggins, 1997, “Efficient Inflation Estimation,” National Bureau of Economic Research (NBER) Working Paper No. 6183.
Debelle, Guy and Cheng Lim, 1998, “Preliminary Considerations of an Inflation Targeting Framework for the Philippines,” IMF Working Paper 98/39.
Wozniak, Przemyslaw, 1998, “Relative Prices and Inflation in Poland, 1989–1997: The Special Role of Administered Price Increases,” World Bank Policy Research Working Paper No. 1879.
Prepared by Robert Wescott.
For a more complete analysis of the inflation process in Poland, including in-period and out-of-period simulations with a simple multivariate econometric model, see Peter Christoffersen and Robert Wescott, “Is Poland Ready for Inflation Targeting?” IMF Working Paper, (forthcoming).
In fact, Wozniak (1998), using a modeling framework suggested by Ball and Mankiw, has estimated that the large administered price increases associated with transition in Poland produced substantial upward inflationary pressures between 1989 and 1997.
This non-normality is confirmed by statistical tests. Applying a Jarque-Bera test for the null hypothesis of normality leads to a rejection at the 1 percent level for both the top and middle panels of Figure 2.
The last panel in Figure 3 depicts an index of the thirteen government affected goods and service prices weighted together by their respective weights in the CPI (and re-based).
These outliers reflect the effects of a change of government and large expected movements in administered prices.
Using conventional augmented Dickey-Fuller (ADF) tests, the null hypothesis of a unit root cannot be rejected for most of the indicators. Taking first differences and reapplying the ADF tests, the presence of a unit root is typically rejected when including one lag. When including more than one lag on the right-hand-side, the power of the ADF tests drops, and the null hypothesis of a unit root again often cannot be rejected. Although an argument could be made for keeping the interest rates in levels, it was decided to work with first differences of all variables in the analysis below.
The variable mnemonics are listed in Table 1.
Figures for the impulse responses for the other three inflation measures are not presented in the interests of saving space, but generally they show slightly less significant results than for the mean-trimmed inflation case (T20).
The lag-length is fixed at 4 months in the bivariate regressions underlying Figure 5.
This is probably because both the unemployment rate and CPI inflation in Poland have been falling monotonically for most of the 1990s and labor markets have not yet reached equilibrium.