Forecasting Inflation in Western Balkans - Does One Shoe Fit All?
Inflation is one of key policy variables in the European Union. Keeping inflation below 2 percent is the main proclaimed goal of the European Central Bank. Monitoring inflation dynamics is even more important for the EU candidate countries, as it forms a crucial part of the so called Maastricht criteria. For Western Balkan countries, which have all experienced a hyperinflation period at the first phase of transition, inflation awareness seems to be even more relevant than in case of old EU member states. Although the recent past evidence has shown that the Western Balkan countries have gone through the period of mild inflation rates, the underlying instabilities of their economies might bring about yet another inflation spin.However, a literature on the determinants of the inflation generation process in the Western Balkan countries is, with a few notable exceptions, scarce. Even less is publicly available on the forecasting practices of the region’s central banks. Since this variable is expected to be one of the most strictly monitored if and when Western Balkan countries realise their EU aspirations, the analysis provided in this paper will try to fill the existing gap in the literature.
Inflation dynamics in the euro area and in new EU members: Implications for monetary policy
Abstract The paper provides evidence on New Keynesian Phillips Curves (NKPCs) for the euro area and a group of seven new member countries that joined the European Union (EU) in and after 2004 employing two alternative methods of estimation: the generalized method of moments (GMM) and time-varying coefficient (TVC) estimation techniques. The latter technique has the advantage over the former technique in that it can deal with possible specification biases and can detect spurious relationships that may have arisen from the structural changes of the past decades. The NKPCs are used to compare inflation dynamics between the euro area and the group of seven new member countries and are connected with sufficient conditions for monetary policies to be good policies. If the slopes of the short run Phillips curves are similar, in that the frequency of nominal price adjustments are comparable, the implication is that a one-size monetary policy may fit all — that is, both the euro area and the group comprising the new members.
Empirical Estimates of Reaction Functions for the Euro Area
This study contains a set of estimates of reaction functions for the euro area based on a monthly data set starting in 1985. The main aim is to assess the performance of Taylor rules and to evaluate whether alternative specifications based, inter alia, on the inclusion of additional variables not contained in the original specification proposed by Taylor or the use of different measures of the output gap and the inflation term, can better track the interest rate setting in the euro area. An interesting result is that monetary developments (in the form of a money growth gap indicator derived as the deviation of M3 growth from its estimated reference value) enter significantly as an additional variable in a Taylor-like policy rule specification for the euro area.