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The end of moderate inflation in three transition economies?

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  • Josef C. Brada
  • Ali M. Kutan

Abstract

This paper examines the ending of moderate rates of inflation in three transition economies, the Czech Republic, Hungary and Poland at the end of 1998. We argue that the institutions for the conduct of monetary policy in these countries were relatively weak and that monetary policy was unsupported by fiscal policy and hampered by multiple objectives. Using a VAR model of inflation, we show that, under a variety of assumptions, foreign prices and the persistence of inflation are the key determinants of inflation in these countries. From this finding we conclude that the end of moderate inflation in the Czech Republic, Hungary and Poland was largely due to the decline in import prices in the second half of 1998, and thus it may be a temporary phenomenon.

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Bibliographic Info

Paper provided by Federal Reserve Bank of St. Louis in its series Working Papers with number 1999-003.

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Date of creation: 1999
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Handle: RePEc:fip:fedlwp:1999-003

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Keywords: Monetary policy ; Fiscal policy ; Inflation (Finance) ; Czech Republic ; Hungary ; Poland;

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References

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  1. Szapary, Gyorgy & Jakab, Zoltan M., 1998. "Exchange Rate Policy in Transition Economies: The Case of Hungary," Journal of Comparative Economics, Elsevier, vol. 26(4), pages 691-717, December.
  2. DeJong, David N., 1992. "Co-integration and trend-stationarity in macroeconomic time series : Evidence from the likelihood function," Journal of Econometrics, Elsevier, vol. 52(3), pages 347-370, June.
  3. DeJong, D.N. & Whiteman, C.H., 1991. "The Case for Trend-Stationarity is Stronger than we Thought," Working Papers 91-05, University of Iowa, Department of Economics.
  4. J Bonin & M Schaffer, 1995. "Banks, Firms, Bad Debts and Bankruptcy in Hungary 1991-4," CEP Discussion Papers dp0234, Centre for Economic Performance, LSE.
  5. Martin Feldstein & James H. Stock, 1993. "The Use of Monetary Aggregate to Target Nominal GDP," NBER Working Papers 4304, National Bureau of Economic Research, Inc.
  6. Gottschalk, Jan & Moore, David, 2001. "Implementing Inflation Targeting Regimes: The Case of Poland," Journal of Comparative Economics, Elsevier, vol. 29(1), pages 24-39, March.
  7. DeJong, David N. & Whiteman, Charles H., 1991. "Reconsidering 'trends and random walks in macroeconomic time series'," Journal of Monetary Economics, Elsevier, vol. 28(2), pages 221-254, October.
  8. Frederic S. Mishkin & Adam S. Posen, 1998. "Inflation Targeting: Lessons from Four Countries," NBER Working Papers 6126, National Bureau of Economic Research, Inc.
  9. Begg, David, 1998. "Pegging Out: Lessons from the Czech Exchange Rate Crisis," CEPR Discussion Papers 1956, C.E.P.R. Discussion Papers.
  10. Orlowski, Lucjan T., 2001. "Monetary convergence of the EU candidates to the Euro: A theoretical framework and policy implications," ZEI Working Papers B 25-2001, ZEI - Center for European Integration Studies, University of Bonn.
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  16. R. W. Hafer & Ali M. Kutan, 2002. "Detrending and the Money-Output Link: International Evidence," Southern Economic Journal, Southern Economic Association, vol. 69(1), pages 159-174, July.
  17. Ball, Laurence, 1994. "Credible Disinflation with Staggered Price-Setting," American Economic Review, American Economic Association, vol. 84(1), pages 282-89, March.
  18. Josef C. Brada & Ali M. Kutan, 1999. "The persistence of moderate inflation in the czech republic and the czk crisis of may 1997," Prague Economic Papers, University of Economics, Prague, vol. 1999(4).
  19. Dittus Peter, 1994. "Bank Reform and Behavior in Central Europe," Journal of Comparative Economics, Elsevier, vol. 19(3), pages 335-361, December.
  20. Desai, Padma, 1998. "Macroeconomic Fragility and Exchange Rate Vulnerability: A Cautionary Record of Transition Economies," Journal of Comparative Economics, Elsevier, vol. 26(4), pages 621-641, December.
  21. DeJong, David N. & Nankervis, John C. & Savin, N. E. & Whiteman, Charles H., 1992. "The power problems of unit root test in time series with autoregressive errors," Journal of Econometrics, Elsevier, vol. 53(1-3), pages 323-343.
  22. Canova, Fabio, 1998. "Detrending and business cycle facts," Journal of Monetary Economics, Elsevier, vol. 41(3), pages 475-512, May.
  23. William J. McDonough, 1997. "A framework for the pursuit of price stability," Economic Policy Review, Federal Reserve Bank of New York, issue Aug, pages 1-7.
  24. Kutan, Ali M. & Orlowski, Lucjan T., 2006. "Monetary convergence to the Euro," Economic Systems, Elsevier, vol. 30(4), pages 307-310, December.
  25. Miguel A. Savastano & Paul R. Masson & Sunil Sharma, 1997. "The Scope for Inflation Targeting in Developing Countries," IMF Working Papers 97/130, International Monetary Fund.
  26. Hafer, R W & Kutan, A M, 1997. "More Evidence on the Money-Output Relationship," Economic Inquiry, Western Economic Association International, vol. 35(1), pages 48-58, January.
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Citations

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Cited by:
  1. Byung-Yeon Kim & Jukka Pirttilä & Jouko Rautava, 2002. "Money, Barter and Inflation in Russia," Macroeconomics 0209009, EconWPA.
  2. Dibooglu, Selahattin & Kutan, Ali M., 2001. "Sources of Real Exchange Rate Fluctuations in Transition Economies: The Case of Poland and Hungary," Journal of Comparative Economics, Elsevier, vol. 29(2), pages 257-275, June.
  3. Golinelli, Roberto & Rovelli, Riccardo, 2005. "Monetary policy transmission, interest rate rules and inflation targeting in three transition countries," Journal of Banking & Finance, Elsevier, vol. 29(1), pages 183-201, January.
  4. Ekaterina Vostroknutova, 2003. "Polish Stabilization: What can we learn from the I(2) Cointegration Analysis?," Economic Change and Restructuring, Springer, vol. 36(2), pages 177-198, June.
  5. Payne, James E., 2002. "Inflationary dynamics of a transition economy: the Croatian experience," Journal of Policy Modeling, Elsevier, vol. 24(3), pages 219-230, June.
  6. Boriss Siliverstovs & Olena Bilan, 2005. "Modelling Inflation Dynamics in Transition Economies: The Case of Ukraine," Discussion Papers of DIW Berlin 476, DIW Berlin, German Institute for Economic Research.
  7. Wachtel, Paul & Korhonen, Iikka, 2004. "Observations on disinflation in transition economies," BOFIT Discussion Papers 5/2004, Bank of Finland, Institute for Economies in Transition.
  8. Peter Backé & Jarko Fidrmuc & Thomas Reininger & Franz Schardax, 2002. "Price Dynamics in Central and Eastern European EU Accession," Working Papers 61, Oesterreichische Nationalbank (Austrian Central Bank).
  9. Komulainen, Tuomas & Pirttila, Jukka, 2002. " Fiscal Explanations for Inflation: Any Evidence from Transition Economies?," Economic Change and Restructuring, Springer, vol. 35(3), pages 293-316.
  10. Dvorsky, Sandra, 2000. "Measuring Central Bank Independence in Selected Transition Countries and the Disinflation Process," BOFIT Discussion Papers 13/2000, Bank of Finland, Institute for Economies in Transition.
  11. 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, ZEI - Center for European Integration Studies, University of Bonn.
  12. Kim, Byung-Yeon, 2001. "Determinants of Inflation in Poland: A Structural Cointegration Approach," BOFIT Discussion Papers 16/2001, Bank of Finland, Institute for Economies in Transition.
  13. Dibooglu, Sel & Kutan, Ali M., 2005. "Sources of inflation and output movements in Poland and Hungary: Policy implications for accession to the economic and monetary union," Journal of Macroeconomics, Elsevier, vol. 27(1), pages 107-131, March.
  14. repec:onb:oenbwp:y::i:61:b:1 is not listed on IDEAS
  15. Mikek, Peter, 2008. "Alternative monetary policies and fiscal regime in new EU members," Economic Systems, Elsevier, vol. 32(4), pages 335-353, December.

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