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Inflation Dynamics in FYR Macedonia

  • Maral Shamloo

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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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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  1. Alexander Mihailov & Fabio Rumler & Johann Scharler, 2011. "The Small Open-Economy New Keynesian Phillips Curve: Empirical Evidence and Implied Inflation Dynamics," Open Economies Review, Springer, vol. 22(2), pages 317-337, April.
  2. Lindé, Jesper, 2001. "Estimating New-Keynesian Phillips Curves: A Full Information Maximum Likelihood Approach," Working Paper Series 129, Sveriges Riksbank (Central Bank of Sweden), revised 30 Apr 2001.
  3. Ben S. Bernanke & Jean Boivin & Piotr Eliasz, 2004. "Measuring the effects of monetary policy: a factor-augmented vector autoregressive (FAVAR) approach," Finance and Economics Discussion Series 2004-03, Board of Governors of the Federal Reserve System (U.S.).
  4. Alexander Mihailov & Fabio Rumler & Johann Scharler, 2011. "Inflation Dynamics in the New EU Member States: How Relevant Are External Factors?," Review of International Economics, Wiley Blackwell, vol. 19(1), pages 65-76, 02.
  5. Sylvia Kaufmann & Johann Scharler, 2009. "Bank-Lending Standards, the Cost Channel and Inflation Dynamics," Economics working papers 2009-16, Department of Economics, Johannes Kepler University Linz, Austria.
  6. Jean Boivin & Marc Giannoni & Ilian Mihov, 2007. "Sticky Prices and Monetary Policy: Evidence from Disaggregated U.S. Data," NBER Working Papers 12824, National Bureau of Economic Research, Inc.
  7. 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.
  8. Gali, Jordi & Gertler, Mark, 1999. "Inflation dynamics: A structural econometric analysis," Journal of Monetary Economics, Elsevier, vol. 44(2), pages 195-222, October.
  9. 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.
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