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Sources of inflation and output fluctuations in Poland and Hungary: Implications for full membership in the European Union

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  • Dibooglu, Selahattin
  • Kutan, Ali M.

Abstract

This paper examines the sources of fluctuations in inflation and output in two leading transitioneconomy candidates for admission to the European Union (EU), Poland and Hungary. Using a rational expectations, dynamic open economy aggregate supply- aggregate demand model, we consider real oil price, supply, balance of payments, demand, and monetary disturbances incorporating important features of transition economies such as balance of payments disturbances and finite capital mobility. Evidence indicates that supply shocks explain a sizable portion of price level movements in Hungary while demand shocks are dominant in price level movements in Poland. Monetary shocks are an important source of output fluctuations in the short run in Hungary suggesting nominal inertia. In Poland, real demand shocks affect output in the short run (up to one year), while monetary shocks are negligible. Estimates of “core inflation” based on historical realizations of the shocks suggest that a major component of inflation has been demand driven, “core” inflation. Finally, policy implications of these findings regarding EU membership are evaluated.

Suggested Citation

  • Dibooglu, Selahattin & Kutan, Ali M., 2001. "Sources of inflation and output fluctuations in Poland and Hungary: Implications for full membership in the European Union," ZEI Working Papers B 16-2001, University of Bonn, ZEI - Center for European Integration Studies.
    • Handle: RePEc:zbw:zeiwps:b162001
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    Cited by:

    1. Wojciech Maliszewski, 2002. "Monetary Policy in Transition: Structural Econometric Modelling and Policy Simulations," CASE Network Studies and Analyses 0246, CASE-Center for Social and Economic Research.
    2. repec:dau:papers:123456789/3303 is not listed on IDEAS
    3. Kim, Byung-Yeon & Pirttila, Jukka, 2004. "Money, barter, and inflation in Russia," Journal of Comparative Economics, Elsevier, vol. 32(2), pages 297-314, June.
    4. Kierzenkowski, Rafał, 2002. "The Multi-Regime Bank Lending Channel and the Effectiveness of the Polish Monetary Policy Transmission During Transition," CEPR Discussion Papers 3624, C.E.P.R. Discussion Papers.
    5. Kierzenkowski, Rafal, 2005. "The multi-regime bank lending channel and the effectiveness of the Polish monetary policy transmission during transition," Journal of Comparative Economics, Elsevier, vol. 33(1), pages 1-24, March.

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    More about this item

    Keywords

    Business Cycles; Inflation; Transition Economies; Time Series Models;
    All these keywords.

    JEL classification:

    • E3 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles
    • P2 - Political Economy and Comparative Economic Systems - - Socialist and Transition Economies
    • O5 - Economic Development, Innovation, Technological Change, and Growth - - Economywide Country Studies
    • C5 - Mathematical and Quantitative Methods - - Econometric Modeling

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