Relatives Prices and Inflation in Poland 1989-1997

Introduction

The relationship between inflation and relative price variability has been in the center of economic dispute since the early 1970s. It is primarily the oil shocks that made economists turn their attention to the fact that the two phenomena: the general price level and the variability of individual inflation rates have moved in the same direction for longer periods of time and that their peaks often coincided. Following that observation the extensive body of literature have tried to explain the relationship theoretically and then support it with empirical analysis. However, up to now, both the nature of the association and its causation remain unclear. Theories were developed linking relative price variability to the level of anticipated as well as unanticipated inflation. Some authors have found that it is the increased variability of individual inflation rates that raises the general price level while others maintain that the relationship is caused by macroeconomic disturbances that raise both the inflation rateand increase relative price variability.