Poland

• Author: Abebe Aemro Selassie
• Pages: 8-9

Page 8

With the attainment of broad macroeconomic stability, Poland proceeded to adopt an inflation targeting (IT) framework in late-1998. Whether inflation dynamics and the monetary transmission mechanism would allow the successful implementation of such a framework has been the subject of a number of studies. ¹ Christoffersen and Wescott's (1999) study confirmed the continued existence of considerable volatility in the inflation process late in the transition process. Previous research (Griffiths and Pujol, 1996) had pointed to the skewed distribution of price increases as being a source of inflation persistence. ² In the early transition years, administrative price hikes and large relative prices swings contributed to non-normality. More recently, this pattern is attributable to the large weight of foodstuffs (which tend to be more volatile) in the CPI basket and excise tax changes.

Beyond contributing to inflation persistence, non-normality makes modeling headline inflation extremely difficult. This is problematic because an important prerequisite for a successful IT framework is the ability to produce inflation forecasts and, indeed, have some understanding of how changes in policy instruments affect inflation (Debelle and others, 1997). ³ Consistent with the literature, Christoffersen and Wescott sought to establish a link between policy instruments and a number of measures of core inflation. By and large, their efforts to establish this link were not successful, partly because of the monotonic decline in both inflation and short-term policy interest rates over the sample period (1992-98). Doyle (2001) sought to model inflation over a longer sample period (1992-2000), but concludes that the challenge to identify a parsimonious representation of inflation in Poland remains.

These findings have influenced IMF staff advice in a number of ways. In particular, the absence of a sufficiently robust understanding of the link between policy rates and inflation, as well as volatility of the headline inflation rate, has led staff to argue for wider bands around a central inflation target in Poland, placing greater emphasis on core measures of inflation and lengthening the target horizon. Interestingly, Mourmouras (2002) concludes that, relative to a peer group of eight emerging market inflation targeters, Poland's inflation targeting performance has not been unfavorable. ⁴ Despite missing all three of its annual targets to date (over- shooting them in 1999 and 2000, and undershooting in 2001), Poland was able to disinflate successfully.

Another recurring theme on research on Poland in recent years has been the sustainability of the large...