Determinants of low inflation in an emerging, small open economy. A comparison of aggregated and disaggregated approaches

We analyse the determinants of the protracted period of exceptionally low inflation in the emerging, small open economy of Poland. We consider a fairly standard set of macroeconomic variables and establish a structural VAR model estimated using Bayesian methods and disentangle the influence of the global and domestic, supply and demand factors affecting headline and core inflation by means of the mixture of zero and sign restrictions. Next, we extend the analysis on a battery of inflation components and construct inflation indices sensitive to the global and domestic factors. We find that the excessive disinflation has been primarily caused by the deteriorating domestic conditions whilst deflation has resulted from the convolution of waning global demand and plummeting oil prices. Disaggregated analysis corroborates the conclusion of the aggregated approach but reveals considerable heterogeneities in the sensitivity of inflation components to the identified shocks. We conclude that the disaggregated analysis brings important information for the monetary policy conduct.