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Estimating pure inflation in the Polish economy

Author Info

Listed author(s):
  • 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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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
Handle: RePEc:wse:wpaper:37
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Keywords: monetary policy; relative prices; factor model; core inflation;

Find related papers by JEL classification:

  • C43 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods: Special Topics - - - Index Numbers and Aggregation
  • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
  • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies

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  1. Michal Brzoza-Brzezina & Jesus Crespo Cuaresma, 2007. "Mr. Wicksell and the global economy: What drives real interest rates?," Working Papers 2007-06, Faculty of Economics and Statistics, University of Innsbruck.
  2. Jushan Bai & Serena Ng, 2002. "Determining the Number of Factors in Approximate Factor Models," Econometrica, Econometric Society, vol. 70(1), pages 191-221, January.
  3. 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).
  4. Cristadoro, Riccardo & Forni, Mario & Reichlin, Lucrezia & Veronese, Giovanni, 2001. "A Core Inflation Index for the Euro Area," CEPR Discussion Papers 3097, C.E.P.R. Discussion Papers.
  5. Jacek Kotlowski, 2008. "Forecasting inflation with dynamic factor model – the case of Poland," Working Papers 24, Department of Applied Econometrics, Warsaw School of Economics.
  6. 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.
  7. Mark W. Watson & Ricardo Reis, 2007. "Measuring changes in the value of the numeraire," 2007 Meeting Papers 324, Society for Economic Dynamics.
  8. Michael F. Bryan & Stephen G. Cecchetti, 1993. "The consumer price index as a measure of inflation," Economic Review, Federal Reserve Bank of Cleveland, issue Q IV, pages 15-24.
  9. 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 128-157, July.
  10. Laurence Ball & N. Gregory Mankiw, 1995. "Relative-Price Changes as Aggregate Supply Shocks," The Quarterly Journal of Economics, Oxford University Press, vol. 110(1), pages 161-193.
  11. Mario Forni & Marc Hallin & Marco Lippi & Lucrezia Reichlin, 2000. "The Generalized Dynamic-Factor Model: Identification And Estimation," The Review of Economics and Statistics, MIT Press, vol. 82(4), pages 540-554, November.
  12. Stock, James H & Watson, Mark W, 2002. "Macroeconomic Forecasting Using Diffusion Indexes," Journal of Business & Economic Statistics, American Statistical Association, vol. 20(2), pages 147-162, April.
  13. 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.
  14. Marlene Amstad & Simon M. Potter, 2009. "Real time underlying inflation gauges for monetary policymakers," Staff Reports 420, Federal Reserve Bank of New York.
  15. 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.
  16. Robert W. Rich & Charles Steindel, 2005. "A review of core inflation and an evaluation of its measures," Staff Reports 236, Federal Reserve Bank of New York.
  17. Reis, Ricardo & Watson, Mark W, 2007. "Relative Goods’ Prices and Pure Inflation," CEPR Discussion Papers 6593, C.E.P.R. Discussion Papers.
  18. 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.
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Blog mentions

As found by EconAcademics.org, the blog aggregator for Economics research:
  1. Michał 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.
  2. Pierzak, Agnieszka, 2013. "Forecasting inflation in Poland using dynamic factor model," MF Working Papers 17, Ministry of Finance in Poland, revised 01 Aug 2013.

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