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Money and Prices in Estonia

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  • Aurelijus Dabušinskas

    ()
    (Bank of Estonia)

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    Abstract

    This paper examines the relationship between money and prices in Estonia in the period 1997Q1-2003Q3. The concept of a price (or real money) gap suggested by the P-star theory is applied to investigate whether information about the current money stock can be used to explain and/or predict GDP deflator inflation over the sample period. The results show that the money gap measure dominates the output gap as an explanatory variable for inflation in the short run. However, the money gap does not seem to be a proper indicator for predicting inflation over longer horizons, say, 12 months ahead. There are some signs that the output gap is becoming a better indicator of future inflation over time, but more data are needed to confirm this hypothesis.

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    File URL: http://www.eestipank.info/pub/en/dokumendid/publikatsioonid/seeriad/uuringud/_2005/_7_2005/_wp_705.pdf
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    Bibliographic Info

    Paper provided by Bank of Estonia in its series Bank of Estonia Working Papers with number 2005-07.

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    Length: 39 pages
    Date of creation: 10 Oct 2005
    Date of revision: 10 Nov 2005
    Publication status: published
    Handle: RePEc:eea:boewps:wp2005-07

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    Postal: Estonia bld. 13, 15095 Tallinn, ESTONIA
    Phone: +3726680719
    Fax: +3726680900
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    Web page: http://www.bankofestonia.info
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    Postal: Estonia bld. 13, 15095 Tallinn, ESTONIA
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    Related research

    Keywords: P-star; inflation; money demand;

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    1. 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.
    2. Stefan Gerlach & Lars E.O. Svensson, 2000. "Money and Inflation in the Euro Area: A Case for Monetary Indicators?," NBER Working Papers 8025, National Bureau of Economic Research, Inc.
    3. Lars E.O. Svensson, 2000. "Does the P* Model Provide Any Rationale for Monetary Targeting?," NBER Working Papers 7178, National Bureau of Economic Research, Inc.
    4. Ahking, Francis W., 2002. "Model mis-specification and Johansen's co-integration analysis: an application to the US money demand," Journal of Macroeconomics, Elsevier, vol. 24(1), pages 51-66, March.
    5. Orphanides, Athanasios & Porter, Richard D., 2000. "P revisited: money-based inflation forecasts with a changing equilibrium velocity," Journal of Economics and Business, Elsevier, vol. 52(1-2), pages 87-100.
    6. John A. Tatom, 1992. "The P-star model and Austrian prices," Working Papers 1992-001, Federal Reserve Bank of St. Louis.
    7. Banerjee, Anindya, et al, 1986. "Exploring Equilibrium Relationships in Econometrics through Static Models: Some Monte Carlo Evidence," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 48(3), pages 253-77, August.
    8. Hans-Eggert Reimers, 2003. "Does Money Include Information for Prices in the Euro Area?," Journal of Economics and Statistics (Jahrbuecher fuer Nationaloekonomie und Statistik), Justus-Liebig University Giessen, Department of Statistics and Economics, vol. 223(5), pages 581-602, September.
    9. Coenen, Günter & Vega, Juan Luis, 1999. "The demand for M3 in the euro area," Working Paper Series 0006, European Central Bank.
    10. Hans-Eggert Reimers, 2003. "Does Money Include Information for Output in the Euro Area?," Swiss Journal of Economics and Statistics (SJES), Swiss Society of Economics and Statistics (SSES), vol. 139(II), pages 231-252, June.
    11. Jurgen A. Doornik & David F. Hendry & Bent Nielsen, 1998. "Inference in Cointegrating Models: UK M1 Revisited," Journal of Economic Surveys, Wiley Blackwell, vol. 12(5), pages 533-572, December.
    12. Hassler, Uwe, 2000. " Cointegration Testing in Single Error-Correction Equations in the Presence of Linear Time Trends," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 62(5), pages 621-32, December.
    13. Brand, Claus & Cassola, Nuno, 2000. "A money demand system for euro area M3," Working Paper Series 0039, European Central Bank.
    14. 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 841-58, September.
    15. John A. Tatom, 1990. "The link between monetary aggregates and prices," Working Papers 1990-002, Federal Reserve Bank of St. Louis.
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