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

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

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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.

Ⅰ. Introduction

Ⅱ. Money-Demand Stabilization : Review of the Literature

Ⅲ. Money Demand in the Long Run

Ⅳ. Monetary Overhang and Inflation Forecast

Ⅴ. Robustness Analysis

Ⅵ. Conclusions and Policy Implications

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