Moderate Inflation in Poland: A Real Story

IMF Working Papers, June 1, 1996

Source details

The paper examines why moving from moderate to low inflation is almost always slow or costly, using the Polish experience.
Three principal factors identified:
- Transition to a market economy produced significant changes in relative prices.
- Wage and price indexation magnified the inflationary effect of shocks to relative prices.
- Lagging structural reform, including failure to extend hard budget constraints to all sectors, reduced the effectiveness of monetary policy.
The paper concludes that reduced money supply growth combined with structural reform offers the best prospect for achieving low inflation.

Relative price changes during the transition were significant and central to Poland’s inflation experience.
Indexation mechanisms (wage and price indexation) amplified the inflationary impact of relative price shocks.
Structural weaknesses—particularly the failure to impose hard budget constraints across sectors—undermined monetary policy transmission and effectiveness.
Policy sequencing matters: monetary restraint is more likely to succeed in lowering inflation when accompanied by structural reform.

Implement structural reforms to extend hard budget constraints to all sectors of the economy.
Pursue reduced money supply growth as part of a coordinated strategy with structural reform to move from moderate to low inflation.
Address wage and price indexation mechanisms to limit magnification of inflationary shocks from relative price movements.

Consumer price indexes; Exchange rates; Foreign exchange; Inflation; Monetary policy; Monetary tightening; Price adjustments; Prices
Keywords include: broad money; consumer price; cost of living index; Eastern Europe; exchange rate; inflation rate; loss-making firm; marginal product of labor; monetary policy; restructuring process; utility company.

Thierry Pujol and Mark E Griffiths, June 1, 1996. IMF Working Paper No. 1996/057.