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P-Star-Model Based Analysis Of Inflation Dynamics In The Czech Republic

Author

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  • Frait, Jan
  • Komarek, Lubos
  • Kulhanek, Lumir

Abstract

The paper presents a version of the P* model of inflation dynamics for a small open economy and applies it to the Czech economy time series from the period of 1991-1999. The paper is organised as follows. Section 2 presents a brief discussion of the monetary policy indicators issue. Section 3 describes the logics of the P* model. Section 4 explains the extension of the basic model to the case of a small open economy. Section 5 applies the model to the Czech economy data and presents the estimates of the Czech inflation dynamics determination. The results of the estimates suggest that the dynamics of the Czech inflation evolves in line with a P* model logic: the inflation in the current period changes to close the price gap, i.e. the gap between actual and equilibrium price level. The foreign component of the price gap seems to be more important than domestic component which supports the hypothesis that the equilibrium price level in the Czech Republic is to a large extent determined by the monetary policy in the EU via the explicit or implicit peg of the Czech currency exchange rate to EUR. The overall results show that the inflation in the Czech Republic is primarily a monetary phenomenon.

Suggested Citation

  • Frait, Jan & Komarek, Lubos & Kulhanek, Lumir, 2000. "P-Star-Model Based Analysis Of Inflation Dynamics In The Czech Republic," Economic Research Papers 269336, University of Warwick - Department of Economics.
    • Handle: RePEc:ags:uwarer:269336
    DOI: 10.22004/ag.econ.269336
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    References listed on IDEAS

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    1. repec:onb:oenbwp:y::i:20:b:1 is not listed on IDEAS
    2. Karl-Heinz Tödter & Hans-Eggert Reimers, 1994. "P-Star as a link between money and prices in Germany," Review of World Economics (Weltwirtschaftliches Archiv), Springer;Institut für Weltwirtschaft (Kiel Institute for the World Economy), vol. 130(2), pages 273-289, June.
    3. Clemens J. M. Kool & John A. Tatom, 1994. "The P-star model in five small economies," Review, Federal Reserve Bank of St. Louis, issue May, pages 11-29.
    4. Hans Groeneveld, 1995. "Monetary Spill-over Effects in the ERM: The Case of Austria, a Former Shadow Member," Working Papers 20, Oesterreichische Nationalbank (Austrian Central Bank).
    5. Hallman, Jeffrey J & Porter, Richard D & Small, David H, 1991. "Is the Price Level Tied to the M2 Monetary Aggregate in the Long Run?," American Economic Review, American Economic Association, vol. 81(4), pages 841-858, September.
    6. John A. Tatom, 1990. "The P-star approach to the link between money and prices," Working Papers 1990-008, Federal Reserve Bank of St. Louis.
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    Cited by:

    1. Pablo García S. & Rodrigo Valdés P, 2003. "Dinero e Inflación en el Marco de Metas de Inflación," Working Papers Central Bank of Chile 198, Central Bank of Chile.

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    More about this item

    Keywords

    International Development; Research Methods/ Statistical Methods;

    JEL classification:

    • 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

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