| Monetary Integration, Money-Demand Stability, and the Role of Monetary Overhang in Forecasting Inflation in CEE Countries |
Claudiu Tiberiu ALBULESCU, Dominique Pepin, |
Management Department, Politehnica University of Timisoara, 2, P-ta. Victoriei, Timisoara, Romania
CRIEF, University of Poitiers, 2, Rue Jean Carbonnier, Bât. A1 (BP 623), 86022, Poitiers, France |
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Corresponding Author:
Claudiu Tiberiu ALBULESCU ,Tel: +40 743 089 759, Email: claudiual@yahoo.com |
| Copyright ©2018 The Journal of Economic Integration |
| ABSTRACT |
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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.
JEL Classification
E41: Demand for Money
E47: Forecasting and Simulation: Models and Applications
E52: Monetary Policy
F41: Open Economy Macroeconomics |
| Keywords:
Monetary integration | Money demand stability | Monetary overhang | Inflation forecasts | Currency substitution | CEE countries
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