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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 ()

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Abstract: This paper first shows that the long-run money demand in Central and Eastern European (CEE) countries is better described by an open-economy model (OEM), which considers a currency substitution effect, than by a closed-economy model (CEM) used in several previous studies. Second, from the estimated models we derive two different measures of monetary overhang. Then we compare the ability of the OEM-based and the CEM-based measures of monetary overhang to predict inflation in the CEE countries, namely the Czech Republic, Hungary and Poland. While we cannot detect a significant difference of forecast accuracy between the two competing models, we show that the OEM-based forecast model that reveals a stable long-run money demand encompasses the CEM-based version for the CEE countries.

Keywords: currency substitution; CEE countries; money demand stability; inflation forecasts; monetary overhang (search for similar items in EconPapers)
Date: 2018-12
New Economics Papers: this item is included in nep-cba, nep-mac, nep-mon and nep-tra
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Published in Journal of Economic Integration, Center for Economic Integration, Sejong Institution, Sejong University, 2018, 33 (4), pp.841-879. ⟨10.11130/jei.2018.33.4.841⟩

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Persistent link: https://EconPapers.repec.org/RePEc:hal:journl:hal-01720319

DOI: 10.11130/jei.2018.33.4.841

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