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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
    Date of revision:
    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. Alexander Mihailov & Fabio Rumler & Johann Scharler, 2008. "The Small Open-Economy New Keynesian Phillips Curve: Empirical Evidence and Implied Inflation Dynamics," Economics working papers 2008-17, Department of Economics, Johannes Kepler University Linz, Austria.
    2. Sylvia Kaufmann & Johann Scharler, 2010. "Bank-Lending Standards, the Cost Channel and Inflation Dynamics," Working Papers 164, Oesterreichische Nationalbank (Austrian Central Bank).
    3. Jean Boivin & Serena Ng, 2005. "Understanding and Comparing Factor-Based Forecasts," International Journal of Central Banking, International Journal of Central Banking, vol. 1(3), December.
    4. Linde, Jesper, 2005. "Estimating New-Keynesian Phillips curves: A full information maximum likelihood approach," Journal of Monetary Economics, Elsevier, vol. 52(6), pages 1135-1149, September.
    5. Ben Bernanke & Jean Boivin & Piotr S. Eliasz, 2005. "Measuring the Effects of Monetary Policy: A Factor-augmented Vector Autoregressive (FAVAR) Approach," The Quarterly Journal of Economics, MIT Press, vol. 120(1), pages 387-422, January.
    6. Alexander Mihailov & Fabio Rumler & Johann Scharler, 2010. "Inflation Dynamics in the New EU Member States: How Relevant Are External Factors?," Economics & Management Discussion Papers em-dp2010-04, Henley Business School, Reading University.
    7. Richard Clarida & Jordi Gali & Mark Gertler, 1999. "The Science of Monetary Policy: A New Keynesian Perspective," NBER Working Papers 7147, National Bureau of Economic Research, Inc.
    8. Jordi Gali & Mark Gertler, 2000. "Inflation Dynamics: A Structural Econometric Analysis," NBER Working Papers 7551, National Bureau of Economic Research, Inc.
    9. Jean Boivin & Marc P. Giannoni & Ilian Mihov, 2009. "Sticky Prices and Monetary Policy: Evidence from Disaggregated US Data," American Economic Review, American Economic Association, vol. 99(1), pages 350-84, March.
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