Is inflation a global threat?

Positive signs emerging from the global economy prompt many economists to voice their concerns about the threat of imminent inflation. However, a careful investigation of the current economic environment suggests that while some risks exist and need to be monitored, inflation is very unlikely to get out of control in the short- to medium-term.economic crisis, inflation

Relative prices and inflation in Poland, 1989-97 : the special role of administered price increases

The author evaluates how much relative price shifts affected inflation in Poland between 1989 and 1997. He uses a theoretical model that predicts a positive relationship between variance and skewness in the distribution of relative price changes and the general inflation rate. Regressions controlling for various shocks revealed that significant relative price changes -- especially the large administered price increases associated with adjustment -- produced substantial upward inflationary pressures. Growth in money and wages were shown to fuel inflation. Appreciation of the real exchange rate lowered it. Administered price increases -- in utilities and other sectors controlled by the government -- dominated inflation from 1989-97. And the adjustment of many controlled prices is not yet complete. Ideally, future administered increases should be frequent and moderate to prevent the large price shifts that increase inflation. But because frequent price increases are likely to be politically unpopular, sizable increases may be in order so that the current underevaluation of numerous services will diminish more quickly.Economic Theory&Research,Banks&Banking Reform,Insurance&Risk Mitigation,Markets and Market Access,Environmental Economics&Policies,Markets and Market Access,Access to Markets,Economic Theory&Research,Environmental Economics&Policies,Inflation

Do Candidate Countries Fit the Optimum-Currency-Area Criteria?

This paper attempts to assess the degree to which CEE candidate countries fulfill Optimal Currency Area criteria set out in the literature. The literature review provided focuses on the seminal contributions of Mundell (1961) and McKinnon (1963) and later evolution of the theory as well as papers related to CEE candidate countries. The empirical analysis indicates that candidate countries are already very open to trade with the EU, in many cases much more open than the members of the EU themselves. Nonetheless, results of the static real activity comovements, with the exception of Hungary and Slovenia, point to weak or even negative correlations of shocks in the Euro-zone and respective acceding economies. Another approach pursued in the paper involves examining the nominal and real exchange rate variability to determine whether the exchange rate flexibility constitutes an important instrument of absorbing asymmetric shocks. From the comparison of the exchange rate stability in CEE with that of ClubMed countries in the years preceding the formation of the EMU it follows that the candidate countries as a group resemble the ClubMed countries in the early, rather than, mid 1990s.OCA, candidate countries, EMU accession, Euro zone, asymmetric shocks, business cycle co-movements, exchange rate fluctuations

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.inflation, Poland

Relatives Prices and Inflation in Poland 1989-1997

This paper has been designed as an attempt to estimate the magnitude of the influence of relative price shifts on the overall price level in Poland during the transition period 1989-1997. For that purpose, the theoretical model has been found that builds on menu costs and trend inflation to derive a positive relationship between variance and skewness of the distribution of relative price changes and the general inflation. The model allowed to estimate the effect of relative price shifts within the framework controlling for nominal and real shocks. Using Polish data, a set of three versions of the model were estimated. All of them yielded high explanatory power and statistically significant coefficients on most variance and skewness variables thus giving a strong empirical support to the theoretical relationship. Larger shifts in relative prices accompanying the adjustment process and detected by higher va riance in the equation were proven to exert substantial upward pressure on inflation that persists over time. On the other hand, high positive skewness reflecting the domination of the adjustment process by few large increases was confirmed to produce contemporaneous upward impulse that tends to wear off after one quarter but is stronger in magnitude than that coming from higher variance. Including other explanatory variables like real exchange rate, wages and/or money allowed for observing the relative importance of inflationary factors. The analysis revealed that money and wages remain to be the main factors fueling inflation and can jointly account for almost three quarters of quarterly inflation. If their impact is evaluated separately, wages contribute about one half of inflation and domestic credit almost one third. On the other hand, real exchange rate appreciation was confirmed to significantly lower inflation. The measure based on different paces of inflation between tradables and non-tradables has proven to be a substantial dampening factor with an average elasticity of about minus three quarters.inflation, relative price variability, Poland, transition

Two Exercises of Inflation Modelling and Forecasting for Azerbaijan

The paper proposes two econometric models of inflation for Azerbaijan: one based on monthly data and eclectic, another based on quarterly data and takes into account disequilibrium at the money market. Inflation regression based on monthly data showed that consumer prices dynamics is explained by money growth (the more money, the higher the inflation), exchange rate behaviour (appreciation drives disinflation), commodities price dynamics (“imported” inflation) and administrative changes in regulated prices. For the quarterly model, nominal money demand equation (with inflation, real non-oil GDP and nominal interest rate on foreign currency deposits as predictors) and money supply equation were estimated, and error-correction mechanism from money demand equation was included into inflation equation. It is shown that disequilibrium at the money market (supply higher than demand) drives inflation together with money supply growth and nominal exchange rate depreciation and administrative changes in prices. No cost-push variables appeared to be significant in this equation specification. Both models give similar inflation projections, but sudden changes in money demand (2012) lead to significant differences between the projections. It is shown that money is the most important inflation determinant that explains up to 97.8% of CPI growth between 2012 and 2015, and that in order to keep inflation under control the Central Bank of Azerbaijan should link money supply to real non-oil GDP growth.Inflation modelling, Inflation forecasting, Money demand, Money supply, Azerbaijan

Harrod-Balassa-Samuelson Effect in Selected Countries of Central and Eastern Europe

This study investigates the HBS effect in a panel of nine CEECs during 1993:Q1-2003:Q4 (unbalanced panel). Prior to estimating the model, we analyze several key assumptions of the model (e.g. wage equalisation, PPP and sectoral division) and elaborate on possible consequences of their failure to hold. In the empirical part of the paper, we check the level of integration of the variables in our panel using the Pedroni panel-stationarity tests. We then investigate the internal and external version of the HBS effect with the Pedroni panel-cointegration tests as well as by means of group-mean FMOLS and PMGE estimations to conclude that there is a strong evidence in support of the internal HBS and ambiguous evidence regarding the external HBS. Our estimates of the size of inflation and real appreciation consistent with the HBS effect turned out generally within the range of previous estimates in the literature (0-3 % per annum). However, we warn against drawing automatic policy conclusions based on these figures due to very strong assumptions on which they rest (which may not be met in near future). Finally, following the hypotheses put forward in the literature, we elaborate and attempt to evaluate empirically the potential impact of exchange rate regimes on the magnitude of the HBS effect.Harrod-Balassa-Samuelson effect, Real Exchange Rate, Central and Eastern Europe, EMU

Credibility of the Exchange Rate Policy in Transition Countries

Credibility of an exchange rate policy is one of the most important factors contributing to success or failure of any stabilization program. Authorities usually hope that the public will trust official exchange rate commitments and take decisions regarding domestic currency holdings accordingly. However, as the experience of several countries analyzed in this study shows, this is not always the case. Economic agents behave in line with their own expectations which need not directly reflect central bank's commitments but are most often a combination of official policy and public's own notions regarding its actual future course. There are clear advantages of high credibility of exchange rate policy to the country's disinflation efforts. It can help bring inflation down quicker and reduce inevitable output losses. Naturally, this prompts the question of whether one can quantify credibility and find factors that are affecting it. Various studies found in the literature have attempted to find an answer to this problem. In line with these efforts, our paper tries to shed new light on the issue. It makes use of the new theoretical model specially designed to approximate credibility of exchange rate policy and provides its empirical application for a number of transition economies that have actively used exchange rate policy in their stabilization programs during the 1990s. For each country we present the modelderived coefficient of credibility, draw conclusions from the model's predictions and confront it with the behavior of other macroeconomic indicators. The resulting analysis and discussion enable us to identify a set of possible "independent" factors explaining the developments of credibility. Our paper is composed as follows. Chapter 2 presents the theoretical model and its dynamics. Subsequent chapters are devoted to individual countries and contain empirical estimation of the model and the discussion of results. Chapters 3-10 contain studies of Poland, Bulgaria, Estonia, Lithuania, Latvia, Moldova and Georgia. Finally, chapter 11 concludes with summary of results and findings.transition country, credibility, exchange rate

Transmission Mechanism of Monetary Policy in Centraland Eastern Europe

The purpose of this study is to review the existing literature on transmission mechanism in CEE and put it in a broader context of the problems related to research on monetary policy. Also, we attempted to conduct empirical analysis for 10 transition economies using analogous methodology for the same sample period 1995-2000. In this comparative framework a series of Granger causality tests and impulse response analysis were carried out to asses the strength of two major transmission channels: interest rate and exchange rate channel. Also in the empirical part, we tried to look for the existence of long-run relationships between the basic set of macroeconomic variables in the countries under investigation.transmission mechanism, monetary policy, inflation, transition