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Estimating pure inflation in the Polish economy

Michal Brzoza-Brzezina and Jacek Kotłowski ()

No 37, Working Papers from Department of Applied Econometrics, Warsaw School of Economics

Abstract: This paper uses a restricted factor model to estimate the HICP index excluding relative prices changes. The index thus obtained, hereinafter referred to as pure inflation, demonstrates stronger relationship to the central bank instrument (short-term interest rate) than the HICP index and selected measures of core inflation. Pure inflation has also a forecasting performance for future HICP comparable or better than that of competing models. The estimated variable indicates a much weaker role of changes in relative prices in the recent period of rising inflation (2006-2008) than during previous inflation increases (1999-2000 and 2004-05). This may show that inflation was mainly driven by demand pressures in the years 2006-2008.

Keywords: monetary policy; relative prices; factor model; core inflation (search for similar items in EconPapers)
JEL-codes: C43 E31 E58 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-cba and nep-mon
Date: 2009-06-28
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