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Price formation, nominal anchors, and stabilization policies in Hungary : an empirical analysis

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  • Solimano, Andres
  • Yuravlivker, David E.
  • DEC
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    Abstract

    The authors empirically explore the inflationary process in Hungary. Using monthly data, they provide econometric estimates of the determinants of inflation for 1990-92. Empirical estimates of price equations - both consumer price index (CPI) and producer price index (PPI) - show the exchange rate's quantitative importance and statistical significance in price formation in Hungary during the period of intensified reform as the economy became more open to international trade in both inputs and final goods. Their estimates show that the money supply affects consumer and producer prices with several lags; its impact on prices is small in the short run. Nominal wages have a more significant effect on the CPI than on the PPI. The authors present policy simulations of alternative rules for the exchange rate and the money supply and their effect on the rate of inflation and the level of the real exchange rate. They find that a rule of fixing the exchange rate entails a lower level of CPI inflation - 5 percentage points less of CPI inflation a year - than if the rule is based only on reducing the rate of money growth (to 1 percent a month). But a fixed exchange rate policy is associated with greater appreciation of the real exchange rate than is the policy of money-based disinflation - nearly 4 percentage points more real appreciation a year. A PPI-based exchange rate rule stabilizes the real exchange rate at the cost of a substantial acceleration in inflation. These exercises illustate the nature and magnitude of the tradeoffs between faster disinflation and the level of external competitiveness in an open economy such as Hungary that uses the exchange rate as a nominal anchor in disinflation.

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    Bibliographic Info

    Paper provided by The World Bank in its series Policy Research Working Paper Series with number 1234.

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    Date of creation: 31 Dec 1993
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    Handle: RePEc:wbk:wbrwps:1234

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    Related research

    Keywords: Economic Theory&Research; Environmental Economics&Policies; Economic Stabilization; Macroeconomic Management; Markets and Market Access;

    References

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    1. Robert S. Pindyck & Andrés Solimano, 1993. "Economic Instability and Aggregate Investment," NBER Chapters, in: NBER Macroeconomics Annual 1993, Volume 8, pages 259-318 National Bureau of Economic Research, Inc.
    2. Kiguel, Miguel A & Liviatan, Nissan, 1992. "The Business Cycle Associated.with Exchange Rate-Based Stabilizations," World Bank Economic Review, World Bank Group, vol. 6(2), pages 279-305, May.
    3. Commander, Simon & Coricelli, Fabrizio, 1992. "Price-Wage Dynamics and Inflation in Socialist Economies: Empirical Models for Hungary and Poland," World Bank Economic Review, World Bank Group, vol. 6(1), pages 33-53, January.
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