Inflation in Poland: How Much Can Globalization Explain?

Abstract

This Working Paper should not be reported as representing the views of the IMF.The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate. This paper analyses how globalization has affected inflation in the New EU Members States (NMS), and Poland in particular, since 1995. It finds prices have become less sensitive to domestic economic conditions as trade integration rose, possibly because monetary policy incentives increasingly shifted toward meeting price stability objectives. Quantitatively, globalization appears to have lowered Polish prices by ½ to 1 percentage point annually since 1995, substantially more than in advanced economies. However, future inflation-dampening effects in the NMS are likely to be smaller as the pace of increases in trade openness moderates.

Panel estimating effects of macroeconomic determinants on inflation: Evidence of Western Balkan

“…In industrialized countries" GDP growth, trade openness, inflation, and freedom index, while in unindustrialized countries gross-fixed capital, trade openness, and efficiency variables have a positive impact on foreign direct investment. Allard (2007) investigates to what extent the inflation in Poland is determined by global factors and globalization. She empirically analyzes the association between inflation and globalization at the cumulative, macroeconomic level for Central and Eastern European (CEE) with CPI inflation explained by trade openness defined as the ratio of imports of GDP and output gaps derived with Hodrick Prescott filters for GDP.…”

“…The results offer an indication that the sensitivity of prices to national economic environments in the eight CEE countries has been falling in the wake of higher trade integration. Allard (2007) evaluates the influence of globalization in Poland and discovers that globalization would have lowered domestic prices by between ½ and 1 percentage point per year since the middle of the 1990s, mainly through lower markups on prices. Allard's model, therefore, offers a strong empirical indication of an adverse association between globalization and inflation.…”

Financial Globalization, Output Gap and Foreign Output Gap on inflation: Evidenced from Developing Economies

“…While in the case of disaggregated analysis, financial globalization and import prices boost the inflation level, the output gap has a positive effect on inflation in the case of low income developing economies like according to demand-pull inflation, Unemployment rate, confirmed Phillip's curve hypothesis in low income and upper middle income developing countries, while has positive in lower middle income developing countries and Financial globalization positive effects inflation level (Allard, 2007a;Bianchi & Civelli, 2015;Mumtaz & Surico, 2012;Satti et al, 2013;Wagner, 2001).…”

“…In contrast, the Sargan test demonstrates that the models' instruments are valid, which can handle the problem endogeneity and chi-square probability indicates the model is accurate. (Allard, 2007a;Bianchi & Civelli, 2015;Mumtaz & Surico, 2012;Satti et al, 2013;Wagner, 2001) in section 3. The global output gap boosts the inflation level in all developing states and low-income, lowermiddle-income, and upper-middle-income groups (Barth & Bennett, 1975).…”

“…Like Allard (2007a) investigated the factors of inflation in the presence of globalization. She found that globalization has an influential and significant role in determining the domestic inflation level and concludes that globalization reduced inflation.…”