Sources of inflation and output movements in Poland and Hungary: Policy implications for accession to the economic and monetary union

The paper examines the sources of fluctuations in inflation and output in Poland and Hungary. Using a rational expectations, dynamic open economy aggregate supply-aggregate demand model and considering several disturbances, it is found that balance of payments shocks are important in price level movements in Hungary while nominal shocks are dominant in affecting prices in Poland. Monetary shocks affect output in the short run in Hungary while supply shocks dominate output movements in Poland. A major component of inflation is demand driven, “core” inflation. Finally, the paper discusses policy implications of findings regarding membership in the Economic and Monetary Union.