Modelling Inflation in Croatia

Maruška Vizek and Tanja Broz

No 703, Working Papers from The Institute of Economics, Zagreb

Abstract: 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.

Keywords: inflation modelling; cointegration; general-to-specific; Croatia (search for similar items in EconPapers)
JEL-codes: C51 C53 E31 E37 (search for similar items in EconPapers)
Pages: 21 pages
Date: 2007-06
New Economics Papers: this item is included in nep-cba, nep-mac and nep-mon
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (6)

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Related works:
Journal Article: Modeling Inflation in Croatia (2009)
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Persistent link: https://EconPapers.repec.org/RePEc:iez:wpaper:0703

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