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Money demand stability, monetary overhang and inflation forecast in the CEE countries

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  • Claudiu Tiberiu Albulescu
  • Dominique Pépin

    (CRIEF - Centre de Recherche sur l'Intégration Economique et Financière - Université de Poitiers)

Abstract

This paper first shows that the long-run money demand in Central and Eastern European (CEE) countries is better described by an open-economy model (OEM), which considers a currency substitution effect, than by a closed-economy model (CEM) used in several previous studies. Second, from the estimated models we derive two different measures of monetary overhang. Then we compare the ability of the OEM-based and the CEM-based measures of monetary overhang to predict inflation in the CEE countries, namely the Czech Republic, Hungary and Poland. While we cannot detect a significant difference of forecast accuracy between the two competing models, we show that the OEM-based forecast model that reveals a stable long-run money demand encompasses the CEM-based version for the CEE countries.

Suggested Citation

  • Claudiu Tiberiu Albulescu & Dominique Pépin, 2018. "Money demand stability, monetary overhang and inflation forecast in the CEE countries," Working Papers hal-01720319, HAL.
  • Handle: RePEc:hal:wpaper:hal-01720319
    Note: View the original document on HAL open archive server: https://hal.archives-ouvertes.fr/hal-01720319
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    Keywords

    CEE countries ; currency substitution; money demand stability; monetary overhang; inflation forecasts;

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