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Evaluating Inflation Determinants with a Money Supply Rule in Four Central and Eastern European EU Member States

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Listed:
  • Aaron Mehrotra

    (Bank of Finland, Institute for Economies in Transition)

  • Tomáš Slacík

    (Oesterreichische Nationalbank, Foreign Research Division)

Abstract

We evaluate the monetary determinants of inflation in the Czech Republic, Hungary, Poland and Slovakia by using the McCallum rule for money supply. The deviation of actual money growth from the rule is included in the estimation of Phillips curves for the four economies by Bayesian model averaging. We find that money provides information about price developments over a horizon of ten quarters ahead, albeit the estimates are in most cases rather imprecise. Moreover, the effect of excessive monetary growth on inflation is mixed: It is positive for Poland and Slovakia, but negative for the Czech Republic and Hungary. Nevertheless, these results suggest that money does provide information about future inflation and that a McCallum rule could potentially be used in the future as an additional indicator of the monetary policy stance once the precision of the estimation improves with more data available.

Suggested Citation

  • Aaron Mehrotra & Tomáš Slacík, 2009. "Evaluating Inflation Determinants with a Money Supply Rule in Four Central and Eastern European EU Member States," Focus on European Economic Integration, Oesterreichische Nationalbank (Austrian Central Bank), issue 3, pages 6-21.
    • Handle: RePEc:onb:oenbfi:y:2009:i:3:b:1
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    References listed on IDEAS

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    1. Lawrence J. Christiano & Roberto Motto & Massimo Rostagno, 2003. "The Great Depression and the Friedman-Schwartz hypothesis," Proceedings, Federal Reserve Bank of Cleveland, pages 1119-1215.
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    3. Petra Gerlach-Kristen, 2007. "A Two-Pillar Phillips Curve for Switzerland," Swiss Journal of Economics and Statistics (SJES), Swiss Society of Economics and Statistics (SSES), vol. 143(IV), pages 425-448, December.
    4. Júlia Lendvai, 2005. "Hungarian Inflation Dynamics," MNB Occasional Papers 2005/46, Magyar Nemzeti Bank (Central Bank of Hungary).
    5. Céline Allard, 2007. "Inflation in Poland: How Much Can Globalization Explain?," IMF Working Papers 2007/041, International Monetary Fund.
    6. ., 2000. "High inflations and contemporary monetary theory," Chapters, in: Macroeconomic Instability and Coordination, chapter 11, Edward Elgar Publishing.
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    Cited by:

    1. El-Shagi, Makram & Tochkov, Kiril, 2022. "Divisia monetary aggregates for Russia: Money demand, GDP nowcasting and the price puzzle," Economic Systems, Elsevier, vol. 46(4).
    2. Martin Feldkircher & Florian Huber & Isabella Moder, 2016. "Modeling the evolution of monetary policy rules in CESEE," Focus on European Economic Integration, Oesterreichische Nationalbank (Austrian Central Bank), issue 1, pages 8-27.

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    More about this item

    Keywords

    Determinants of inflation; McCallum rule; Phillips curve; Bayesian model averaging;
    All these keywords.

    JEL classification:

    • C11 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Bayesian Analysis: General
    • C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes
    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • O52 - Economic Development, Innovation, Technological Change, and Growth - - Economywide Country Studies - - - Europe

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