P-star-model based analysis of inflation dynamics in the Czech Republic
Frait, Jan, Komárek, Luboš and Kulhánek, Lumír (2000) P-star-model based analysis of inflation dynamics in the Czech Republic. Working Paper. University of Warwick, Department of Economics, Coventry.
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The paper presents a version of the P* model of inflation dynamics for a small open economy and applies it to the Czech economy time series from the period of 1991-1999. The paper is organised as follows. Section 2 presents a brief discussion of the monetary policy indicators issue. Section 3 describes the logics of the P* model. Section 4 explains the extension of the basic model to the case of a small open economy. Section 5 applies the model to the Czech economy data and presents the estimates of the Czech inflation dynamics determination. The results of the estimates suggest that the dynamics of the Czech inflation evolves in line with a P* model logic: the inflation in the current period changes to close the price gap, i.e. the gap between actual and equilibrium price level. The foreign component of the price gap seems to be more important than domestic component which supports the hypothesis that the equilibrium price level in the Czech Republic is to a large extent determined by the monetary policy in the EU via the explicit or implicit peg of the Czech currency exchange rate to EUR. The overall results show that the inflation in the Czech Republic is primarily a monetary phenomenon.
|Item Type:||Working or Discussion Paper (Working Paper)|
|Subjects:||H Social Sciences > HG Finance|
|Divisions:||Faculty of Social Sciences > Economics|
|Library of Congress Subject Headings (LCSH):||Inflation (Finance), Monetary policy -- Czech Republic, Foreign exchange rates, Money -- Czech Republic|
|Series Name:||Warwick economic research papers|
|Publisher:||University of Warwick, Department of Economics|
|Place of Publication:||Coventry|
|Number of Pages:||12|
|Status:||Not Peer Reviewed|
|Access rights to Published version:||Open Access|
|References:||Fels, J., Mayer, T.: Money and Prices in a Mini-EMU. German Economic Commentary No. 6/1995, International Economics Research, Goldman-Sachs 1995. Groeneveld, H.: Monetary Spill-Over Effects in the ERM: the Case of Austria, a Former Shadow Member. Oesterreichische Nationalbank Working Paper, 1995, No. 20. Hallman, J.; Porter, R.; Small, D.: Is the Price Level Tied to the M2 Monetary Aggregate in the Long Run? American Economic Review, September 1991. Hoeller, P.; Poret, P.: Is P-Star a Good Indicator of Inflationary Pressures in OECD Countries? OECD Economic Studies, Autumn 1991, No. 17. Kool, C.; Tatom, J.: The P-Star Model in Five Small Economies. Federal Reserve Bank of St. Louis Review, 1994, No. 3. Tatom, J.: The P-Star Approach to the Link between Money and Prices. Federal Reserve Bank of St. Louis Working Paper 90-008, 1990. Tödter, K-H.; Reimers, H-E.: P-Star as a Link between Money and Prices in Germany. Weltwirtschaftliches Archiv, 1994, No. 2. Wesche, K.: Die Geldnachfrage in Europa. Aggregations Probleme und Empirie. Heidelberg, Physica-Verlag 1998.|
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