Sources of Inflation and Output Fluctuations in Poland and Hungary: Implications for Full Membership in the European Union

SIUC Discussion Paper Series No. 01-16

38 Pages Posted: 20 Oct 2001

See all articles by Selahattin Dibooglu

Selahattin Dibooglu

University of Missouri at Saint Louis - Department of Economics

Ali M. Kutan

Southern Illinois University at Edwardsville

Date Written: October 2001

Abstract

This paper examines the sources of fluctuations in inflation and output in two leading transition- economy 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.

Keywords: Business Cycles, Inflation, Transition Economies, Time Series Models

JEL Classification: E3, P2, O5, C5

Suggested Citation

Dibooglu, Selahattin and Kutan, Ali M., Sources of Inflation and Output Fluctuations in Poland and Hungary: Implications for Full Membership in the European Union (October 2001). SIUC Discussion Paper Series No. 01-16, Available at SSRN: https://ssrn.com/abstract=287475 or http://dx.doi.org/10.2139/ssrn.287475

Selahattin Dibooglu (Contact Author)

University of Missouri at Saint Louis - Department of Economics ( email )

8001 Natural Bridge Road
St Louis, MO 63121
United States

Ali M. Kutan

Southern Illinois University at Edwardsville ( email )

Department of Economics and Finance AH-3141
Edwardsville, IL 62026-1102
United States
618-650-3473 (Phone)
618-650-3047 (Fax)

HOME PAGE: http://https://ideas.repec.org/e/pku30.html