Determinants of Low Inflation in an Emerging, Small Open Economy through the Lens of Aggregated and Disaggregated Approach

ABSTRACT

We analyze the sources of the protracted period of exceptionally low inflation in the emerging, small open economy of Poland using a structural Bayesian Vector Autoregression (BVAR) identified with a mixture of zero and sign restrictions. We find that excessive disinflation has been caused by deteriorating domestic conditions whilst deflation has resulted from the convolution of waning global demand and plummeting oil prices. Disaggregated analysis corroborates the conclusion from the aggregated approach but reveals considerable heterogeneities in the sensitivity of inflation components to the identified shocks. We conclude that the structural analysis on the disaggregated price indices unveils additional information for the monetary policy conduct.

KEY WORDS:

• Bayesian vector autoregression
• disaggregated price indices
• low inflation
• sign restrictions
• small open economy

JEL CLASSIFICATION:

• C32
• E31
• E52

Acknowledgements

We would like to thank two anonymous referees as well as the editor for their valuable comments. We also thank the participants of the 2017 Scottish Economic Society conference, the 9th International Conference Economic Challenges in Enlarged Europe and the 2017 International Conference on Economic Modelling for their remarks. Any shortcomings or errors in the paper remain the sole responsibility of the authors. The views expressed herein are those of their authors and do not necessarily reflect those of Narodowy Bank Polski or the Warsaw School of Economics.

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Correction Statement

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