Money demand stability, monetary overhang and inflation forecasting in CEE countries

Mardi | 2017-07-11
16h00-17h20 en salle des thèses

Claudiu ALBULESCU – Dominique PÉPIN

This paper tests the money demand stability in Central and Eastern European (CEE) countries, comparing two competing models, namely the Cagan’s (1956) closed-economy money demand model, and the Albulescu et al.’s (2017) open-economy model adapted for the CEE countries. The purpose is to see if the money demand is more stable in a generalized, open-economy model, which considers a currency substitution effect. Further, we check to what extent the monetary overhang represents a good predictor of inflation in the Czech Republic, Hungary and Poland. We discover that in the long run, the open-economy specification of the money demand model gives more consistent results than the closed-economy version, except for the Czech Republic, where no significant differences appear. Finally, we discover that money may improve the forecasts of inflation vis-à-vis a benchmark model only in the long run and only if we consider the currency substitution between the domestic currency and the euro. This result is however consistent only for Poland.