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Inflation Dynamics in FYR Macedonia

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  • Maral Shamloo
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    Abstract

    In this paper we study the dynamics of inflation in Macedonia, provide three forecasting tools and draw some policy conclusions from the quantitative results. We explore three forecasting methods for inflation. We use a Dynamic Factor Model (DFM) for short-term, monthly forecasting. We also develop two quarterly models: A Vector Error Correction Model (VECM), and a New Keynesian Phillips Curve (NKPC) for a more structural model of inflation. The NKPC shows a significant effect of output gap and inflation expectations on current inflation, confirming that the expectations channel of monetary transmission mechanism is strong. In terms of forecast-error variance, we show that all three models do very well in one-period ahead forecasting.

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    Bibliographic Info

    Paper provided by International Monetary Fund in its series IMF Working Papers with number 11/287.

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    Length: 23
    Date of creation: 01 Dec 2011
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    Handle: RePEc:imf:imfwpa:11/287

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    Related research

    Keywords: Forecasting models; Interest rates; inflation; monetary policy; central bank; inflation dynamics; monetary economics; monetary authority; actual inflation; average inflation; monetary autonomy; terms of trade; monetary fund; monetary policy regime; monetary policy autonomy; monetary policy transmission mechanism; inflation data; foreign exchange; effective exchange rates; national bank; price level; general level of prices; inflation targeting; monetary aggregates; monetary transmission mechanism; monetary transmission; autonomous monetary policy; monetary policy reaction functions; rational expectations;

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    1. Jean Boivin & Serena Ng, 2005. "Understanding and Comparing Factor-Based Forecasts," International Journal of Central Banking, International Journal of Central Banking, International Journal of Central Banking, vol. 1(3), December.
    2. Jordi Galí & Mark Gertler, 1998. "Inflation dynamics: A structural econometric analysis," Economics Working Papers, Department of Economics and Business, Universitat Pompeu Fabra 341, Department of Economics and Business, Universitat Pompeu Fabra.
    3. Linde, Jesper, 2005. "Estimating New-Keynesian Phillips curves: A full information maximum likelihood approach," Journal of Monetary Economics, Elsevier, Elsevier, vol. 52(6), pages 1135-1149, September.
    4. Mark Gertler & Jordi Gali & Richard Clarida, 1999. "The Science of Monetary Policy: A New Keynesian Perspective," Journal of Economic Literature, American Economic Association, American Economic Association, vol. 37(4), pages 1661-1707, December.
    5. Jean Boivin & Marc Giannoni & Ilian Mihov, 2007. "Sticky Prices and Monetary Policy: Evidence from Disaggregated U.S. Data," NBER Working Papers 12824, National Bureau of Economic Research, Inc.
    6. Alexander Mihailov & Fabio Rumler & Johann Scharler, 2008. "The Small Open-Economy New Keynesian Phillips Curve: Empirical Evidence and Implied Inflation Dynamics," Economics & Management Discussion Papers, Henley Business School, Reading University em-dp2008-63, Henley Business School, Reading University.
    7. Ben S. Bernanke & Jean Boivin & Piotr Eliasz, 2004. "Measuring the effects of monetary policy: a factor-augmented vector autoregressive (FAVAR) approach," Finance and Economics Discussion Series, Board of Governors of the Federal Reserve System (U.S.) 2004-03, Board of Governors of the Federal Reserve System (U.S.).
    8. Alexander Mihailov & Fabio Rumler & Johann Scharler, 2011. "Inflation Dynamics in the New EU Member States: How Relevant Are External Factors?," Review of International Economics, Wiley Blackwell, Wiley Blackwell, vol. 19(1), pages 65-76, 02.
    9. Sylvia Kaufmann & Johann Scharler, 2009. "Bank-Lending Standards, the Cost Channel and Inflation Dynamics," Economics working papers, Department of Economics, Johannes Kepler University Linz, Austria 2009-16, Department of Economics, Johannes Kepler University Linz, Austria.
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