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Estimating pure inflation in the Polish economy

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Author Info

  • Michal Brzoza-Brzezina
  • Jacek Kotlowski

    ()
    (National Bank of Poland, Warsaw School of Economics)

Abstract

This paper uses a restricted factor model to estimate the HICP index excluding relative prices changes. The index thus obtained, hereinafter referred to as pure inflation, demonstrates stronger relationship to the central bank instrument (short-term interest rate) than the HICP index and selected measures of core inflation. Pure inflation has also a forecasting performance for future HICP comparable or better than that of competing models. The estimated variable indicates a much weaker role of changes in relative prices in the recent period of rising inflation (2006-2008) than during previous inflation increases (1999-2000 and 2004-05). This may show that inflation was mainly driven by demand pressures in the years 2006-2008.

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File URL: http://kolegia.sgh.waw.pl/pl/KAE/struktura/IE/struktura/ZES/Documents/Working_Papers/aewp03-09.pdf
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Bibliographic Info

Paper provided by Department of Applied Econometrics, Warsaw School of Economics in its series Working Papers with number 37.

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Length: 23 pages
Date of creation: 28 Jun 2009
Date of revision:
Handle: RePEc:wse:wpaper:37

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Keywords: monetary policy; relative prices; factor model; core inflation;

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References

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  1. Laurence Ball & N. Gregory Mankiw, 1995. "Relative-Price Changes as Aggregate Supply Shocks," NBER Working Papers 4168, National Bureau of Economic Research, Inc.
  2. Riccardo Cristadoro & Mario Forni & Lucrezia Reichlin & Giovanni Veronese, 2001. "A core inflation index for the euro area," Temi di discussione (Economic working papers) 435, Bank of Italy, Economic Research and International Relations Area.
  3. M. Ayhan Kose & Christopher Otrok & Charles H. Whiteman, 2003. "International Business Cycles: World, Region, and Country-Specific Factors," American Economic Review, American Economic Association, vol. 93(4), pages 1216-1239, September.
  4. Michael F. Bryan & Stephen G. Cecchetti, 1993. "The Consumer Price Index as a Measure of Inflation," NBER Working Papers 4505, National Bureau of Economic Research, Inc.
  5. Stock J.H. & Watson M.W., 2002. "Forecasting Using Principal Components From a Large Number of Predictors," Journal of the American Statistical Association, American Statistical Association, vol. 97, pages 1167-1179, December.
  6. Haroon Mumtaz & Paolo Surico, 2012. "Evolving International Inflation Dynamics: World And Country-Specific Factors," Journal of the European Economic Association, European Economic Association, vol. 10(4), pages 716-734, 08.
  7. Cuaresma, Jesus Crespo & Brzoza-Brzezina, Michal, 2008. "Mr. Wicksell and the global economy: What drives real interest rates?," Working Papers 139, Oesterreichische Nationalbank (Austrian Central Bank).
  8. Ziegler, Christina & Eickmeier, Sandra, 2006. "How good are dynamic factor models at forecasting output and inflation? A meta-analytic approach," Discussion Paper Series 1: Economic Studies 2006,42, Deutsche Bundesbank, Research Centre.
  9. Marlene Amstad & Simon Potter, 2009. "Real time underlying inflation gauges for monetary policymakers," Staff Reports 420, Federal Reserve Bank of New York.
  10. Jushan Bai & Serena Ng, 2002. "Determining the Number of Factors in Approximate Factor Models," Econometrica, Econometric Society, vol. 70(1), pages 191-221, January.
  11. Stock, James H & Watson, Mark W, 2002. "Macroeconomic Forecasting Using Diffusion Indexes," Journal of Business & Economic Statistics, American Statistical Association, vol. 20(2), pages 147-62, April.
  12. Ricardo Reis & Mark W. Watson, 2010. "Relative Goods' Prices, Pure Inflation, and the Phillips Correlation," American Economic Journal: Macroeconomics, American Economic Association, vol. 2(3), pages 128-57, July.
  13. Jacek Kotlowski, 2008. "Forecasting inflation with dynamic factor model – the case of Poland," Working Papers 24, Department of Applied Econometrics, Warsaw School of Economics.
  14. Robert Rich & Charles Steindel, 2005. "A review of core inflation and an evaluation of its measures," Staff Reports 236, Federal Reserve Bank of New York.
  15. Stephen G. Cecchetti & Rita S. Chu & Charles Steindel, 2000. "The unreliability of inflation indicators," Current Issues in Economics and Finance, Federal Reserve Bank of New York, vol. 6(Apr).
  16. Mario Forni & Marc Hallin & Lucrezia Reichlin & Marco Lippi, 2000. "The generalised dynamic factor model: identification and estimation," ULB Institutional Repository 2013/10143, ULB -- Universite Libre de Bruxelles.
  17. Reis, Ricardo & Watson, Mark W, 2007. "Relative Goods’ Prices and Pure Inflation," CEPR Discussion Papers 6593, C.E.P.R. Discussion Papers.
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Citations

Blog mentions

As found by EconAcademics.org, the blog aggregator for Economics research:
  1. MichaÅ? Brzoza-Brzezina
    by Metablog Obserwatora Finansowego in Obserwator Finansowy on 2009-12-10 11:59:58
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Cited by:
  1. Alberto Humala & Gabriel Rodríguez, 2012. "A factorial decomposition of inflation in Peru: an alternative measure of core inflation," Applied Economics Letters, Taylor & Francis Journals, vol. 19(14), pages 1331-1334, September.

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