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Sources of inflation and output fluctuations in Poland and Hungary: Implications for full membership in the European Union


  • Dibooglu, Selahattin
  • Kutan, Ali M.


This paper examines the sources of fluctuations in inflation and output in two leading transitioneconomy candidates for admission to the European Union (EU), Poland and Hungary. Using a rational expectations, dynamic open economy aggregate supply- aggregate demand model, we consider real oil price, supply, balance of payments, demand, and monetary disturbances incorporating important features of transition economies such as balance of payments disturbances and finite capital mobility. Evidence indicates that supply shocks explain a sizable portion of price level movements in Hungary while demand shocks are dominant in price level movements in Poland. Monetary shocks are an important source of output fluctuations in the short run in Hungary suggesting nominal inertia. In Poland, real demand shocks affect output in the short run (up to one year), while monetary shocks are negligible. Estimates of “core inflation” based on historical realizations of the shocks suggest that a major component of inflation has been demand driven, “core” inflation. Finally, policy implications of these findings regarding EU membership are evaluated.

Suggested Citation

  • Dibooglu, Selahattin & Kutan, Ali M., 2001. "Sources of inflation and output fluctuations in Poland and Hungary: Implications for full membership in the European Union," ZEI Working Papers B 16-2001, University of Bonn, ZEI - Center for European Integration Studies.
  • Handle: RePEc:zbw:zeiwps:b162001

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    References listed on IDEAS

    1. Blanchard, Olivier Jean & Quah, Danny, 1989. "The Dynamic Effects of Aggregate Demand and Supply Disturbances," American Economic Review, American Economic Association, vol. 79(4), pages 655-673, September.
    2. Szapary, Gyorgy & Jakab, Zoltan M., 1998. "Exchange Rate Policy in Transition Economies: The Case of Hungary," Journal of Comparative Economics, Elsevier, vol. 26(4), pages 691-717, December.
    3. Gert Wehinger, 2000. "Causes of Inflation in Europe, the United States and Japan: Some Lessons for Maintaining Price Stability in the EMU from a Structural VAR Approach," Empirica, Springer;Austrian Institute for Economic Research;Austrian Economic Association, vol. 27(1), pages 83-107, March.
    4. Ali M. Kutan & Josef C. Brada, 2000. "The evolution of monetary policy in transition economies," Review, Federal Reserve Bank of St. Louis, issue Mar, pages 31-40.
    5. Weber, Axel A., 1997. "Sources of Purchasing Power Disparities between the G3 Economies," Journal of the Japanese and International Economies, Elsevier, vol. 11(4), pages 548-583, December.
    6. Desai, Padma, 1998. "Macroeconomic Fragility and Exchange Rate Vulnerability: A Cautionary Record of Transition Economies," Journal of Comparative Economics, Elsevier, vol. 26(4), pages 621-641, December.
    7. Richard Clarida & Jordi Gali, 1994. "Sources of real exchange rate fluctuations: how important are nominal shocks?," Proceedings, Federal Reserve Bank of Dallas, issue Apr.
    8. Quah, Danny & Vahey, Shaun P, 1995. "Measuring Core Inflation?," Economic Journal, Royal Economic Society, vol. 105(432), pages 1130-1144, September.
    9. Matthew Shapiro & Mark Watson, 1988. "Sources of Business Cycles Fluctuations," NBER Chapters,in: NBER Macroeconomics Annual 1988, Volume 3, pages 111-156 National Bureau of Economic Research, Inc.
    10. Josef Brada & Ali Kutan, 1999. "The End of Moderate Inflation in Three Transition Economies?," William Davidson Institute Working Papers Series 230, William Davidson Institute at the University of Michigan.
    11. Ali M. Kutan & Selahattin Dibooglu, 1998. "Sources of real and nominal exchange rate fluctuations in transition economies," Working Papers 1998-022, Federal Reserve Bank of St. Louis.
    12. Weber, Axel A., 1997. "Sources of Purchasing Power Disparities Between the G3-Economies," Discussion Paper Serie B 419, University of Bonn, Germany.
    13. Brada, Josef C., 1998. "Introduction: Exchange Rates, Capital Flows, and Commercial Policies in Transition Economies," Journal of Comparative Economics, Elsevier, vol. 26(4), pages 613-620, December.
    14. Jordi Galí, 1992. "How Well Does The IS-LM Model Fit Postwar U. S. Data?," The Quarterly Journal of Economics, Oxford University Press, vol. 107(2), pages 709-738.
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    Cited by:

    1. Wojciech Maliszewski, 2002. "Monetary Policy in Transition: Structural Econometric Modelling and Policy Simulations," CASE Network Studies and Analyses 0246, CASE-Center for Social and Economic Research.
    2. Kim, Byung-Yeon & Pirttila, Jukka, 2004. "Money, barter, and inflation in Russia," Journal of Comparative Economics, Elsevier, vol. 32(2), pages 297-314, June.
    3. Kierzenkowski, Rafal, 2002. "The Multi-Regime Bank Lending Channel and the Effectiveness of the Polish Monetary Policy Transmission During Transition," CEPR Discussion Papers 3624, C.E.P.R. Discussion Papers.
    4. Kierzenkowski, Rafal, 2005. "The multi-regime bank lending channel and the effectiveness of the Polish monetary policy transmission during transition," Journal of Comparative Economics, Elsevier, vol. 33(1), pages 1-24, March.

    More about this item


    Business Cycles; Inflation; Transition Economies; Time Series Models;

    JEL classification:

    • E3 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles
    • P2 - Economic Systems - - Socialist Systems and Transition Economies
    • O5 - Economic Development, Innovation, Technological Change, and Growth - - Economywide Country Studies
    • C5 - Mathematical and Quantitative Methods - - Econometric Modeling


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