Money and Prices in Estonia

Aurelijus Dabušinskas ()
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Aurelijus Dabušinskas: Bank of Estonia

No 2005-07, Bank of Estonia Working Papers from Bank of Estonia

Abstract: This paper examines the relationship between money and prices in Estonia in the period 1997Q1-2003Q3. The concept of a price (or real money) gap suggested by the P-star theory is applied to investigate whether information about the current money stock can be used to explain and/or predict GDP deflator inflation over the sample period. The results show that the money gap measure dominates the output gap as an explanatory variable for inflation in the short run. However, the money gap does not seem to be a proper indicator for predicting inflation over longer horizons, say, 12 months ahead. There are some signs that the output gap is becoming a better indicator of future inflation over time, but more data are needed to confirm this hypothesis.

Keywords: P-star; inflation; money demand (search for similar items in EconPapers)
JEL-codes: E31 E41 (search for similar items in EconPapers)
Pages: 39 pages
Date: 2005-10-10, Revised 2005-11-10
New Economics Papers: this item is included in nep-cba, nep-eec, nep-for, nep-mac, nep-mon and nep-tra
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