Inflation Dynamics in FYR Macedonia

Maral Shamloo

No 2011/287, IMF Working Papers from International Monetary Fund

Abstract: 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.

Keywords: WP; Phillips curve; Inflation forecasting; VECM; DFM; understanding inflation dynamics; inflation expectation; Macedonian inflation data; monetary policy shock; inflation term; NKPC forecast; Inflation; Vector error correction models; Central bank policy rate; Vector autoregression; Output gap (search for similar items in EconPapers)
Pages: 23
Date: 2011-12-01
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