Price - wage dynamics and the transmission of inflation in socialist economies : empirical models for Hungary and Poland

The authors of this paper set up a simple inflation model to analyze the transmission and short-run dynamics of inflation in partially reformed socialist economies. The model has features derived from market economies with few producers and sticky prices. It also tries to capture some attributes of socialist economies, including chronic excess demand in goods markets. Most of the empirical analysis focuses on the period after 1982 when market-related reforms had been implemented. The dynamic price and wage models are simultaneously estimated allowing the authors to explore the role and weight of foreign prices and domestic factors in propagating inflation in Hungary and Poland. They find that cost developments are critical in relating exogenous, policy-determined price adjustments to increases in inflation. In most periods, wages were indexed to prices - but in Poland more complex bargaining games emerged which caused an inability to make centralized wage norms hold. Polish planners relied increasingly on price adjustments to address emerging macroeconomic imbalances, but these only further destabilized the system and failed to address the underlying sources of macroeconomic imbalances. In contrast, the Hungarian experience points to some of the ways administered prices can be used to stabilize the system.