Modelling Inflation Using Markov Switching Models: Case of Poland, 1992-2005

Prace i Materiały, 2011, vol. 86, issue 1, pages 185-199

15 Pages Posted: 13 Feb 2014

See all articles by Dawid Żochowski

Dawid Żochowski

European Central Bank

Piotr Białowolski

Harvard TH Chan School of Public Health

Date Written: February 1, 2011

Abstract

We investigate inflation in Poland in the period of economic transition by examining the potential application of Markov Switching Models to model the inflation generating process in Poland. The time horizon of analysis was limited to the period between March 1992 and October 2005 defined as the process of disinflation, i.e. the process of continued decrease in inflation rates following the economic transition period in early 1990s which was accompanied by a high level of inflation. According to the Ball-Friedman hypothesis, variation of inflation during periods of high inflation can be unstable. Indeed, the results show that non-linear models significantly improve the description of inflation generating process in Poland. Apart from univariate Markov Models, we also use a model that incorporates inflation expectations measured by Future Inflation Indicator (FII). We find that the model, where lagged values of FII are included as exogenous variables is significantly better in modelling inflation than simple univariate Markov Model.

Keywords: Markov Switching Models, Inflation modelling, Leading Indicators

JEL Classification: C42, C5, E3

Suggested Citation

Żochowski, Dawid and Białowolski, Piotr, Modelling Inflation Using Markov Switching Models: Case of Poland, 1992-2005 (February 1, 2011). Prace i Materiały, 2011, vol. 86, issue 1, pages 185-199. Available at SSRN: https://ssrn.com/abstract=2393939 or http://dx.doi.org/10.2139/ssrn.2393939

Dawid Żochowski (Contact Author)

European Central Bank ( email )

Sonnemannstrasse 20
Frankfurt am Main, 60314
Germany

Piotr Białowolski

Harvard TH Chan School of Public Health ( email )

665 Huntington Avenue
Suite G28
Boston, MA 02115
United States
6173351629 (Phone)

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