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Estonian Inflation Model


  • Urmas Sepp
  • Andres Vesilind


  • Ulo Kaasik



The objective of model-building was an inflation model suitable for prognosis as well as for simulation. The model serves two purposes. First of all, it is a tool for analysing inflation. Secondly, it is part of the model of Estonian economy, which completes the adjustment loop of the macromodel. The theoretical background of the inflation model derives from four basic features of Estonian economy. Namely, Estonia is: a small and open economy, a transitional economy, economy under currency board arrangement and a market economy. When estimating the model, inflation was decomposed into a) underlying inflation which is a long-run process and b) inflation deviations from the equilibrium which are caused by the short-run impact of inflation factors. The underlying inflation, which reflects the convergence, is determined as a trend. The latter was specified as a time function, ARMA process, moving average and HP filter, whereas the best result was obtained with time function. According to modelling output the short run dynamics of the inflation are determined by three main factors - demand pressure reflected by the GDP gap, exchange rate of the US dollar (which is proxy for foreign prices), and administrative action for correcting regulated prices. The adequacy of the model has been tested on the basis of ex post and ex ante prognosis. The model provided acceptable results in the simulation of endogenous and exogenous shocks

Suggested Citation

  • Urmas Sepp & Andres Vesilind & Ulo Kaasik, 2000. "Estonian Inflation Model," Bank of Estonia Working Papers 2000-1, Bank of Estonia, revised 10 Oct 2000.
  • Handle: RePEc:eea:boewps:wp2000-01

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    References listed on IDEAS

    1. Nadeem Ul Haque & Manmohan S. Kumar & Nelson Mark & Donald J. Mathieson, 1996. "The Economic Content of Indicators of Developing Country Creditworthiness," IMF Staff Papers, Palgrave Macmillan, vol. 43(4), pages 688-724, December.
    2. Cem Karacadag & Michael W. Taylor, 2000. "The New Capital Adequacy Framework - Institutional Constraints and Incentive Structures," SUERF Studies, SUERF - The European Money and Finance Forum, number 8 edited by Morten Balling, August.
    3. International Monetary Fund, 1998. "The Relative Importance of Political and Economic Variables in Creditworthiness Ratings," IMF Working Papers 98/46, International Monetary Fund.
    4. Christian B. Mulder & Brieuc Monfort, 2000. "Using Credit Ratings for Capital Requirementson Lending to Emerging Market Economies; Possible Impact of a New Basel Accord," IMF Working Papers 00/69, International Monetary Fund.
    5. Richard Cantor & Frank Packer, 1996. "Determinants and impact of sovereign credit ratings," Economic Policy Review, Federal Reserve Bank of New York, issue Oct, pages 37-53.
    6. Patrick Sabourin, "undated". "Analyzing and Forecasting Credit Ratings: Some Canadian Evidence," Working Papers-Department of Finance Canada 1999-02, Department of Finance Canada.
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    Cited by:

    1. Raoul Lättemäe, 2001. "Monetary transmission mechanism in Estonia - some theorethical considerations and stylized aspects," Bank of Estonia Working Papers 2001-4, Bank of Estonia, revised 13 Oct 2001.
    2. Urmas Sepp & Raoul Lättemäe & Martti Randveer, 2002. "The History and Sustainability of the CBA in Estonia," Macroeconomics 0212002, EconWPA.
    3. Aurelijus Dabušinskas, 2003. "Exchange rate pass-through to Estonian prices," Bank of Estonia Working Papers 2003-10, Bank of Estonia, revised 10 Dec 2003.

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