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

Claudiu Tiberiu Albulescu (1) , Dominique Pépin (1)

1 CRIEF [Poitiers] - Centre de recherche sur l'intégration économique et financière

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.

Mots clés: inflation forecasts; money demand stability; CEE countries; currency substitution; monetary overhang

Domaines: Économie et finance quantitative [q-fin]

Claudiu Tiberiu Albulescu, Dominique Pépin. Monetary Integration, Money-Demand Stability, and the Role of Monetary Overhang in Forecasting Inflation in CEE Countries. Journal of Economic Integration, 2018, 33 (4), pp.841-879. ⟨10.11130/jei.2018.33.4.841⟩. ⟨hal-01720319⟩