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Determinants of Inflation in a Transition Economy

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  • Bogdan Lissovolik
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    Abstract

    This paper examines determinants of inflation in Ukraine during 1993-2002 in a cointegrating framework. Two basic theoretical models-a markup and a money market model-are tested. While broad money is cointegrated with the CPI for the whole sample and for early subsamples, the cointegration ceases to be statistically significant between 1996-2002, in part because of strong remonetization. The mark-up model offers a more consistent and well-fitting overall framework for 1996-2002 data, pointing inter alia to a greater role of administered prices in the CPI within a fairly mainstream inflation process. The "long-term" monetary transmission mechanism operates through the exchange rate and wages, but broad money clearly enters short-term inflation determinants. Prudent macroeconomic policies, grain harvests, and administrative decisions explain the sharp decline of inflation over 2000-2002.

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    Bibliographic Info

    Paper provided by International Monetary Fund in its series IMF Working Papers with number 03/126.

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    Length: 36
    Date of creation: 01 Jun 2003
    Date of revision:
    Handle: RePEc:imf:imfwpa:03/126

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    Related research

    Keywords: Transition economies; Economic models; inflation; money demand; price level; high inflation; money growth; monetary transmission; foreign exchange; monetary aggregates; actual inflation; money supply; monetary aggregate; low inflation; real output; monetary policy; inflation performance; inflation process; relative price; money market; monetary transmission mechanism; relative price variability; inflation rate; monetary fund; inflation rates; monetary expansion; real money; monetary policies; moderate inflation; monetary ? aggregate; price deflation; inflation data; national bank; inflationary pressure; rate of inflation; real value; monetary policy transmission mechanisms; monetary transmission process; monetary transmission mechanisms; macroeconomic stability; monetary data; rising inflation; monetary framework; lower inflation; demand for money; inflation stabilization; high inflations; inflationary pressures; stock of money; inflation equation;

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    1. de Brouwer, Gordon & Ericsson, Neil R, 1998. "Modeling Inflation in Australia," Journal of Business & Economic Statistics, American Statistical Association, vol. 16(4), pages 433-49, October.
    2. Gunnar Jonsson, 1999. "Inflation, Money Demand, and Purchasing Power Parity in South Africa," IMF Working Papers 99/122, International Monetary Fund.
    3. Johansen, Soren, 1988. "Statistical analysis of cointegration vectors," Journal of Economic Dynamics and Control, Elsevier, vol. 12(2-3), pages 231-254.
    4. Paula De Masi & Vincent Koen, 1997. "Prices in Transition," IMF Working Papers 97/158, International Monetary Fund.
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    Cited by:
    1. Brieuc Monfort & Santiago Peña, 2008. "Inflation Determinants in Paraguay," IMF Working Papers 08/270, International Monetary Fund.
    2. Franziska Ohnsorge & Nienke Oomes, 2005. "Money Demand and Inflation in Dollarized Economies," IMF Working Papers 05/144, International Monetary Fund.
    3. Boriss Siliverstovs & Olena Bilan, 2005. "Modelling Inflation Dynamics in Transition Economies: The Case of Ukraine," Discussion Papers of DIW Berlin 476, DIW Berlin, German Institute for Economic Research.
    4. Oomes, Nienke & Ohnsorge, Franziska, 2005. "Money demand and inflation in dollarized economies: The case of Russia," Journal of Comparative Economics, Elsevier, vol. 33(3), pages 462-483, September.
    5. van Aarle, Bas & de Jong, Eelke & Sosoian, Robert, 2006. "Exchange rate management in Ukraine: Is there a case for more flexibility?," Economic Systems, Elsevier, vol. 30(3), pages 282-305, October.
    6. Era Dabla-Norris & Holger Floerkemeier, 2006. "Transmission Mechanisms of Monetary Policy in Armenia," IMF Working Papers 06/248, International Monetary Fund.
    7. Felix Hammermann & Mark Flanagan, 2007. "What Explains Persistent Inflation Differentials Across Transition Economies?," Kiel Working Papers 1373, Kiel Institute for the World Economy.
    8. Fakhri, Hasanov & Khudayar, Hasanli, 2011. "Why had the Money Market Approach been irrelevant in explaining inflation in Azerbaijan during the rapid economic growth period?," MPRA Paper 29559, University Library of Munich, Germany.
    9. Federico Marongiu, 2004. "Devaluación e Inflacion en Argentina despues de la Convertibilidad," Macroeconomics 0404013, EconWPA.

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