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Evaluating Inflation Determinants with a Money Supply Rule in Four Central and Eastern European EU Member States

  • Aaron Mehrotra

    ()

    (Bank of Finland, Institute for Economies in Transition)

  • Tomáš Slacík

    ()

    (Oesterreichische Nationalbank, Foreign Research Division)

We evaluate the monetary determinants of inflation in the Czech Republic, Hungary, Poland and Slovakia by using the McCallum rule for money supply. The deviation of actual money growth from the rule is included in the estimation of Phillips curves for the four economies by Bayesian model averaging. We find that money provides information about price developments over a horizon of ten quarters ahead, albeit the estimates are in most cases rather imprecise. Moreover, the effect of excessive monetary growth on inflation is mixed: It is positive for Poland and Slovakia, but negative for the Czech Republic and Hungary. Nevertheless, these results suggest that money does provide information about future inflation and that a McCallum rule could potentially be used in the future as an additional indicator of the monetary policy stance once the precision of the estimation improves with more data available.

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File URL: https://www.oenb.at/dam/jcr:0cd124c6-8484-454b-aad6-1f663e95c8ee/feei_2009_q3_studies_mehrotra_tcm16-141351.pdf
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Article provided by Oesterreichische Nationalbank (Austrian Central Bank) in its journal Focus on European Economic Integration.

Volume (Year): (2009)
Issue (Month): 3 ()
Pages: 6-21

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Handle: RePEc:onb:oenbfi:y:2009:i:3:b:1
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  1. Neumann, Manfred J. M. & Greiber, Claus, 2004. "Inflation and core money growth in the euro area," Discussion Paper Series 1: Economic Studies 2004,36, Deutsche Bundesbank, Research Centre.
  2. Bennett T. McCallum & Monica Hargraves, 1994. "A Monetary Impulse Measure for Medium-Term Policy Analysis," IMF Working Papers 94/146, International Monetary Fund.
  3. Petra Gerlach-Kristen, 2007. "A Two-Pillar Phillips Curve for Switzerland," Swiss Journal of Economics and Statistics (SJES), Swiss Society of Economics and Statistics (SSES), vol. 143(IV), pages 425-448, December.
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  5. Jesús Crespo Cuaresma & Tomáš Slacík, 2007. "On the Determinants of Currency Crises: The Role of Model Uncertainty," Focus on European Economic Integration, Oesterreichische Nationalbank (Austrian Central Bank), issue 2, pages 54-68.
  6. Taylor, John B., 1993. "Discretion versus policy rules in practice," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 39(1), pages 195-214, December.
  7. Júlia Lendvai, 2005. "Hungarian Inflation Dynamics," MNB Occasional Papers 2005/46, Magyar Nemzeti Bank (Central Bank of Hungary).
  8. Jesús Crespo Cuaresma & Tomáš Slacík, 2008. "Determinants of Currency Crises: A Conflict of Generations?," Focus on European Economic Integration, Oesterreichische Nationalbank (Austrian Central Bank), issue 1, pages 126-141.
  9. Klaus Masuch & Sergio Nicoletti-Altimari & Massimo Rostagno & Huw Pill, 2003. "The role of money in monetary policymaking," BIS Papers chapters, in: Bank for International Settlements (ed.), Monetary policy in a changing environment, volume 19, pages 158-191 Bank for International Settlements.
  10. Yang, Yuhong, 2007. "Prediction/Estimation With Simple Linear Models: Is It Really That Simple?," Econometric Theory, Cambridge University Press, vol. 23(01), pages 1-36, February.
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  14. Céline Allard, 2007. "Inflation in Poland; How Much Can Globalization Explain?," IMF Working Papers 07/41, International Monetary Fund.
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