Modelling the inflation process in transition economies: Empirical comparison of Poland, Hungary and Czech Republic

Abstract

This paper starts from the observation that inflation in transition economies appears to be persistently high and volatile and attempts to provide some empirical characterisation of the inflation process in three such transition economies: Poland, Hungary and Czech Republic. We first consider the role of monetary growth as a major causal factor for inflation in these economies, and argue that the evidence provides rather weak support for the causal relationship. We then propose a transition economy cost-plus model and estimate this using the equilibrium-correction modelling (ECM) strategy augmented by introduction of a number of transitory factors and changes in the internal structure of the real economy which we believe may have had a significant impact on inflation in these economies. We show that this approach enables us to account for long-run inflation in these economies from the early 1980s to the present despite the turbulence of the latter part of the sample period. Our results support wage and exchange rate based inflation policies.