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Monetary Integration, Money-Demand Stability, and the Role of Monetary Overhang in Forecasting Inflation in CEE Countries

Claudiu Albulescu () and Dominique Pépin ()

Journal of Economic Integration, 2018, vol. 33, issue 4, 841-879

Abstract: This paper tests the stability of the money-demand function in selected Central and Eastern European countries and investigates the extent to which money helps predict inflation. We first show that long-run money demand is better described with an open-economy model, which considers a currency-substitution effect, rather than the closed-economy model used in several previous studies. From the estimated models, we derive two measures of monetary overhang. Then we compare the ability of open-economy model and closed-economy model based measures of monetary overhang to predict inflation in the CEE countries (i.e., the Czech Republic, Hungary, and Poland). Whereas we cannot detect a significant difference in forecast accuracy between the two competing models, we show that the open-economy model based forecast model that reveals a stable long-run money demand encompasses the closed-economy model based version.

Keywords: Monetary integration; Money demand stability; Monetary overhang; Inflation forecasts; Currency substitution; CEE countries (search for similar items in EconPapers)
JEL-codes: E41 E47 E52 F41 (search for similar items in EconPapers)
Date: 2018
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