The paper presents the theoretical foundations, specification of equations, calibration procedures and results of several simulation experiments relating to a quarterly model of the Polish economy - the Small Structural Inflation Model (SSIM). The model was developed with a view to support the central bank in its anti-inflationary policy. According to its assumptions, inflation is an effect of adjustment processes in three interdependent markets: the labour market, the goods market and the broadly understood money market. Such interpretation of inflation allows us to identify three basic sources of inflationary impulses: the supply gap occurring in the goods market, the price-wage spiral originating in the labour market which is characterized by imperfect competition, and, finally, tensions in the money market (including the foreign asset market) which is under a major pressure of the endogenous exchange rate. The model does not embrace the specifics of the Polish transformation economy. The relationships it comprises attempt to reflect a future, target condition of the economy. This approach, admittedly disputable, has been considered superior to attempts to capture the present transient, quickly outdating states of the economy. If the forecasts for the trends in the Polish economy are accurate, the model will increasingly comply with reality, providing a better analytic and forecasting instrument as the transformation progresses. Such methodology of transformation process modeling has enabled the authors to take a better advantage of the experience of other researchers, developing similar models in the OECD countries.

The development of the calibration procedures is also in line with the anticipatory method of equation specification described above. The procedure is hinged upon the concept of M-estimators, with the generalized method of moments used as the objective function. Unlike the classical estimation methods, calibration is a process of a conditional minimization of the loss function. Subordinate conditions ensure the identification of the parameters and complement the brief and fairly uninformative sample with the knowledge, experience and viewpoints of the authors of both the SSIM and other models.

Based on the above concepts, parameters involving 20 equations were calibrated (including 12 stochastic equations) for the demand-supply model of the Polish economy. Although the specification of the equations disregards the features typical of the transformation stage, the model has mostly given a satisfactory picture of the behaviour of endogenous variables in the sample. Additionally, the SSIM model has been exposed to several simulation experiments which verify the reactions of selected endogenous variables of the model to changes in monetary and fiscal policy instruments, as well as changes in the exogenous variables. Some of the most telling findings are presented at the end of the paper. It appears that within the economy described by the SSIM model, an increase in government spending is not effective in boosting economic activity. In the short term, it results in increased inflation, while in the medium term the GDP increments stimulated in this way level off. An increase in the short-term interest rate - both in the short and medium run - expectedly results in a cut in both GDP and inflation, but an additional effect materializes: the substitution effect. It consists in replacing domestic production with imports. After approximately 6 months, crowding out prevails and a relative growth in domestic demand is observable under a fairly stable GDP. This entails a widening of the supply gap. Its ultimate effect is the erosion of anti-inflationary impact of the interest rate increases coupled with an increasing external imbalance.