BOFIT Discussion Papers, Institute for Economies in Transition, Bank of Finland
No 18/2009:
Evaluating inflation determinants with a money supply rule in four Central and Eastern European EU member states
Aaron Mehrotra ()
and Tomas Slacik
Abstract: 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.
Keywords: determinants of inflation; McCallum rule; Phillips curve; Bayesian model averaging; Central and Eastern Europe; (follow links to similar papers)
JEL-Codes: C11; C22; E31; E52; O52; (follow links to similar papers)
29 pages, October 21, 2009
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