Wage and Price Inflation in Poland in the Period of Transition: The Cointegration Analysis

The paper focuses on the long run relationships between wages, prices and labour productivity in the Polish economy by applying recent developments in the field of multivariate cointegration analysis. We followed modeling strategy which is suggested by Greenslade et al. (1999) and present all stages of the analysis which leads to the fully economically identified system of equations representing long run relationships. The investigation is based on the quarterly data from 1992.1 to 1999.2 which covers the period of transition of the Polish economy from the centrally planned system towards the market one. Basing on the empirical results we can argue that wages (costs) were one of the main forces driving inflation in Poland during that period. Also labor productivity proved to be stimulated by the increase of the real wages. On the other hand the hypothesis concerning the relationship between wages and unemployment was rejected by the data.     

Estimation of the equilibrium exchange rate: The CHEER approach

The paper presents the results of an investigation where the concept of a steady-state level of the exchange rate is equated with the capital market equilibrium based on the CHEER approach. The empirical analysis concentrates on Poland, because in this case the assessment of the equilibrium exchange rate is of vital importance. The prospect of the Polish currency joining the ERM2 provokes controversies and requires research into the economic consequences of accession to the EMU. The international transmission mechanisms affecting the Polish economy are identified within the VEqCM framework. The calculations indicate that in the last years of the analyzed sample (i.e. up to December 2006) the zloty/euro exchange rate was slightly overvalued, and the steady-state level was found to have been adjusting to the value of 4.1 zlotys.     

An Exchange Rate Model with Market Pressures and a Contagion Effect

The model we propose includes variables accounting for the behavioral aspects of decision-making in the currency markets, namely the contagion effect between countries in the same region. It combines the classical purchasing power parity (PPP) and uncovered interest rate parity (UIP) hypotheses with the effects of risk aversion in financial markets and of currency market pressures.

The results based on the Polish data confirm that the currency market instabilities arise not only from fundamental factors such as economic activity and the country’s balance of payments, but also from the contagion effect brought about by investors’ tendency to view Poland and its neighbors, the Czech Republic and Hungary, as one group.     

A risk-driven approach to exchange rate modelling

The paper presents a new approach to exchange rate modelling that augments the CHEER model with a sovereign credit default risk as perceived by financial investors making their decisions. In the cointegrated VAR system with nine variables comprised of the short- and long-term interest rates in Poland and the euro area, inflation rates, CDS indices and the zloty/euro exchange rate, four long-run relationships were found. Two of them link term spreads with inflation rates, the third one describes the exchange rate and the fourth one explains the inflation rate in Poland. Transmission of shocks was analysed by common stochastic trends. The estimation results were used to calculate the zloty/euro equilibrium exchange rate.     

The price-wage inflationary spiral in Poland

In this paper the problem of price-wage relationship modelling in the case of a mixed economy is addressed. The empirical investigation was based on Polish annual data for the period of a centrally planned system (1964–1989) and on quarterly data for the period of transition towards a market economy (1990.1–1990.3). The traditional approach proved to be inappropriate because of the variables' nonstationarity. Identification of long-run behaviour was attempted by applying the two-step Engle-Granger's, or alternatively, Johansen's maximum likelihood (ML) procedures. The ML estimator provided better estimates of cointegration vectors and, even more important, allowed as many as three to be found.The main conclusion which can be drawn from the empirical findings is that three variables: price index, average wages and labour productivity, form a multi-dimensional equilibrium space. This property of the described phenomena needs to be taken into serious account when building macroeconometric models explaining the behaviour of the Polish economy.The existence of these three cointegration vectors is troublesome because of unusual problems of interpretation. However, if it is not as a result of misspecification and/or small sample bias, it proves that much remains to be learned about the price-wage mechanisms functioning in economies having a mixed character.     

Topics in macro-modelling of East European countries in the period of transition

Central and European former Centrally Planned Economies (CPEs) entered a period of transition towards market economies. The evolution is marked by a transition from shortage- to demand-determined economies, associated with the abandonment of price control and the introduction of tight wage control. Stabilization programmes (in Poland from 1990), implementing tough deflationary fiscal and monetary policies, brought about the suppression of hyperinflation. The high adjustment costs — deep recession, high rates of unemployment — are characteristics of the early '90s. The deregulation of the public sector and the building of the private one commenced, and will be a long-lasting process.To meet the changes in economic regimes and mechanisms, the existing models had to be adequately respecified and new models constructed. The large W-5 macromodel for Poland, which covers the final and intermediate demands, had to be extended to introduce the market adjustment mechanisms and, more broadly, the financial flows. To meet the needs of short-term financial policies, new quarterly models had to be built, as, for instance, the WK macromodel for the Polish economy. The paper discusses the major problems of the models' specification under the data constraints.     

The Price-Wage Mechanism in Poland: An Endogenous Switching Model

This paper proposes a two-equation price-wage model that enables to test whether the inflationary pressure on wage rate is only present when the rate of inflation is greater than some threshold value. Since the likelihood function for this model is very nonstandard, we develop a small-sample Bayesian approach to estimate its parameters. Our empirical results for Poland, 1962–1993, give support to the hypothesis of the price- wage spiral with a positive threshold value of inflation. This revised version was published online in July 2006 with corrections to the Cover Date.     

Global stability of dynamic models

A necessary and sufficient condition for global stability of dynamic models is summability to one of the long-run elasticities and cointegration. The short-run coefficients automatically satisfy the homogeneity condition. A relevant restriction has to be imposed in the parameter estimation process; otherwise, the ratios of variables appearing in the model will tend to either infinity or zero, which is economic nonsense in most cases. This conclusion is particularly important for the ECM or VEC (SVEC) models that decompose behavior into long and short-run parts.     

Long-term growth scenarios for Poland to 2025

One of the major long-run problems facing the economies in transition is whether their productive potential will achieve the average per capita levels typical of the EU member countries in the foreseeable future. If so, what possible measures should be taken to reach this end? This issue applies in particular to Poland with a GDP per capita being roughly a half of what it is in Greece or Portugal. An attempt to give an answer to these questions is given in the paper by means of simulations based on the W8-D model for the Polish economy. The model served as a tool to elaborate a long-term forecast and run alternative policy scenarios to cover realistic boundaries of the future economic development of Poland up to the year 2025.     

Multisectoral econometric models of the centrally planned economies and the disequilibria

The paper provides a systematic analysis of the properties of large econometric macro models built for the Centrally Planned economies of the '70s and '80s. A specific typology of macro models is introduced, distinguishing between the demand and quasi-demand determined systems on the one hand and the supply and quasi-supply determined systems on the other, and also between complete and incomplete models specifying only one side of economic activities (i.e. generating either demand or supply). It is shown that, under the command type economy, the incomplete, fully supply determined systems prevailed, generating production and showing its allocation. The economic reforms of the '80s, which aimed at a slow transition towards market economies, brought about a tendency towards constructing complete quasi-supply determined systems (especially for Poland and the CSRS). Since, in principle, they were built for shortage economies, the model builders had to allow for unobservables (final and intermediate demand, capacity utilization) and, on the other hand, for an increasing role of the financial phenomena (including prices) and financial policy instruments. A summary of the applications of macro models in forecasting and policy simulations is provided and new tendencies associated with regaining economic equilibria and approaching the market mechanisms emerging in the period of transition are shown.This is a revised and extended version of our paper delivered at the Project LINK Meeting in Paris, 1989 (see W. Welfe 1989b), which made use of our earlier publication (W. Welfe 1988).