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Modeling Inflation in Croatia

Maruška Vizek () and Tanja Broz ()

Emerging Markets Finance and Trade, 2009, vol. 45, issue 6, 87-98

Abstract: This paper constructs a quarterly inflation model for Croatia, using the general-to-specific approach to model inflation dynamics. A two-step procedure is followed. First, we conduct a long-run sectoral analysis of inflation sources, yielding long-run determinants of inflation: markup, excess money, nominal effective exchange rate, and the output gap. Second, we estimate an equilibrium error correction model of inflation, deploying, among other variables of interest, the long-run solutions derived in the first step. The derived model of inflation suggests that inflation inertia and Croatian trading partners' inflation are most important for explaining the short-run behavior of inflation. Apart from these two variables, markup, excess money, output gap, nominal exchange rate, and broad money also contribute to inflation changes in the short run.

Keywords: cointegration; Croatia; general-to-specific; inflation modeling (search for similar items in EconPapers)
Date: 2009
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Handle: RePEc:mes:emfitr:v:45:y:2009:i:6:p:87-98