In Poland between 1989 and 1997, growth in money and wages fueled inflation and appreciation of the real exchange rate lowered it. Large administered price increases associated with adjustment—in utilities and other sectors controlled by the government—produced substantial upward inflationary pressures.
Wozniak evaluates how much relative price shifts affected inflation in Poland between 1989 and 1997. He uses a theoretical model that predicts a positive relationship between variance and skewness in the distribution of relative price changes and the general inflation rate.
Regressions controlling for various shocks revealed that significant relative price changes—especially the large administered price increases associated with adjustment—produced substantial upward inflationary pressures.
Growth in money and wages were shown to fuel inflation. Appreciation of the real exchange rate lowered it.
Administered price increases—in utilities and other sectors controlled by the government—dominated inflation from 1989–97. And the adjustment of many controlled prices is not yet complete. Ideally, future administered increases should be frequent and moderate to prevent the large price shifts that increase inflation. But because frequent price increases are likely to be politically unpopular, sizable increases may be in order so that the current undervaluation of numerous services will diminish more quickly.
This paper—a product of the Office of the Director, Eastern Europe and Central Asia Region—is part of a larger effort in the region to disseminate the findings on the economic transformation in former socialist countries. Copies of the paper are available free from the World Bank, 1818 H Street NW, Washington, DC 20433. Please contact Luca Barbone, room J7-133, telephone 202-473-2556, fax 202-473-8466, Internet address lbarbone@worldbank.org. (41 pages)
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