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Modelling Inflation in Croatia

  • Maruška Vizek
  • Tanja Broz

    ()

    (The Institute of Economics, Zagreb)

The aim of this paper is to construct a quarterly inflation model for Croatia. In order to model inflation dynamics se use the general-to-specific approach. The advantage of this approach is its ability to deliver results based on underlying economic theories of inflation, which are also consistent with the properties of the data. A two step procedure is followed. In the first step, the long-run sectoral analysis of inflation sources is conducted, yielding long-run determinants of inflation (mark-up, excess money, nominal effective exchange rate and the output gap). In the second step, we estimate an equilibrium error correction model of inflation deploying, among other variables of interest, long-run solutions derived in the first step. The derived model of inflation suggests that mark-up and excess money relationships are very important for explaining the short-run behaviour of inflation, as well as the output gap and nominal effective exchange rate, import prices, interest rates and narrow money. Comparing the results of the model suggests that short-run inflation is more responsive to supply side and exchange rate changes than to monetary conditions.

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Paper provided by The Institute of Economics, Zagreb in its series Working Papers with number 0703.

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Length: 21 pages
Date of creation: Jun 2007
Date of revision:
Handle: RePEc:iez:wpaper:0703
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  1. R. Golinelli & R. Orsi, 2001. "Hungary and Poland," Working Papers 424, Dipartimento Scienze Economiche, Universita' di Bologna.
  2. Payne, James E., 2002. "Inflationary dynamics of a transition economy: the Croatian experience," Journal of Policy Modeling, Elsevier, vol. 24(3), pages 219-230, June.
  3. Billmeier, Andreas & Bonato, Leo, 2004. "Exchange rate pass-through and monetary policy in Croatia," Journal of Comparative Economics, Elsevier, vol. 32(3), pages 426-444, September.
  4. Toshitaka Sekine, 2001. "Modeling and Forecasting Inflation in Japan," IMF Working Papers 01/82, International Monetary Fund.
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