Estonian Inflation Model
AbstractThe objective of model-building was an inflation model suitable for prognosis as well as for simulation. The model serves two purposes. First of all, it is a tool for analysing inflation. Secondly, it is part of the model of Estonian economy, which completes the adjustment loop of the macromodel. The theoretical background of the inflation model derives from four basic features of Estonian economy. Namely, Estonia is: a small and open economy, a transitional economy, economy under currency board arrangement and a market economy. When estimating the model, inflation was decomposed into a) underlying inflation which is a long-run process and b) inflation deviations from the equilibrium which are caused by the short-run impact of inflation factors. The underlying inflation, which reflects the convergence, is determined as a trend. The latter was specified as a time function, ARMA process, moving average and HP filter, whereas the best result was obtained with time function. According to modelling output the short run dynamics of the inflation are determined by three main factors - demand pressure reflected by the GDP gap, exchange rate of the US dollar (which is proxy for foreign prices), and administrative action for correcting regulated prices. The adequacy of the model has been tested on the basis of ex post and ex ante prognosis. The model provided acceptable results in the simulation of endogenous and exogenous shocks
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Bibliographic InfoPaper provided by Bank of Estonia in its series Bank of Estonia Working Papers with number 2000-1.
Date of creation: 10 Oct 2000
Date of revision: 10 Oct 2000
Publication status: published
Postal: Estonia bld. 13, 15095 Tallinn, ESTONIA
This paper has been announced in the following NEP Reports:
- NEP-ALL-2005-07-25 (All new papers)
- NEP-CBA-2005-07-25 (Central Banking)
- NEP-CMP-2005-07-25 (Computational Economics)
- NEP-IFN-2005-07-25 (International Finance)
- NEP-MAC-2005-07-25 (Macroeconomics)
- NEP-MON-2005-07-25 (Monetary Economics)
- NEP-TRA-2005-07-25 (Transition Economics)
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- Urmas Sepp & Raoul Lättemäe & Martti Randveer, 2002. "The History and Sustainability of the CBA in Estonia," Macroeconomics 0212002, EconWPA.
- Raoul Lättemäe, 2001.
"Monetary transmission mechanism in Estonia - some theorethical considerations and stylized aspects,"
Bank of Estonia Working Papers
2001-4, Bank of Estonia, revised 13 Oct 2001.
- Raoul Lättemäe, 2002. "Monetary Transmission Mechanism in Estonia - Some Theoretical Considerations and Stylized Aspects," Macroeconomics 0212001, EconWPA.
- Aurelijus Dabušinskas, 2003. "Exchange rate pass-through to Estonian prices," Bank of Estonia Working Papers 2003-10, Bank of Estonia, revised 10 Dec 2003.
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