Using cointegration and error-correction models, this report examines the relative influences of the monetary, labour and foreign sectors on Polish inflation from 1990 to 1999. After the development of a theoretical framework, we make use of a structural system technique wherein cointegration relationships are used to derive deviations from steady-state levels. The deviations are interpreted as excess demand pressure on inflation in a specific sector and eventually incorporated to be able to figure out the short-run dynamics of Polish inflation. The outcomes suggest that the labour and external sectors dominated the determination of Polish inflation over the above period, however their influences have been opposite since 1994. The appreciation of the domestic currency led to lowering inflation, while abnormal wage increases averted inflation from reducing to a lower level. The monetary sector seems not to have exerted impact on inflation, indicating monetary policy continues to be passive.
The transformation process in the former soviet republics and Eastern Europe can be viewed as a transition towards a market economy involving the universal use of medium of exchange.
Source: Institute for Economies in Transition, Bank of Finland
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