engleski

Modelling Inflation in Croatia

This aim of this paper is to construct an inflation model for Croatia. In order to model inflation dynamics in Croatia we use general-to-specific approach. The advantage of this approach is its ability to deliver results based on underlying economic theories of inflation, which are also consistent with properties of the data. A two step procedure is followed. In the first step long run sectoral analysis of inflation is conducted, yielding long run determinants of inflation (mark-up relationship, excess money, nominal effective exchange rate and output gap). In the second step we estimate an equilibrium error correction model of inflation deploying, among other variables of interest, long run solutions derived in the first step. The derived model of inflation suggests that mark-up and excess money relationships are important for explaining short run behaviour of inflation, as well as output gap and nominal effective exchange rate, import prices, interest rates and narrow money. The results of the model, suggest that short run inflation is much more responsive to supply side factors (represented by mark-up) and exchange rate changes than to monetary conditions.

inflation modelling; cointegration; general-to-specific; Croatia

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