Modelling Inflation Using Markov Switching Models: Case of Poland, 1992 – 2005
AbstractWe 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.
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Bibliographic InfoArticle provided by Instytut Rozwoju Gospodarczego (SGH) in its journal Prace i Materiały Instytutu Rozwoju Gospodarczego.
Volume (Year): 86 (2011)
Issue (Month): 1 (January)
Markov Switching Models; Inflation modelling; Leading Indicators;
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- Grier, Kevin B. & Perry, Mark J., 1998. "On inflation and inflation uncertainty in the G7 countries," Journal of International Money and Finance, Elsevier, vol. 17(4), pages 671-689, August.
- John Simon, 1996. "A Markov-switching Model of Inflation in Australia," RBA Research Discussion Papers rdp9611, Reserve Bank of Australia.
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