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Journal of Economic Integration 2018 December;33(4) :841-879.
Monetary Integration, Money-Demand Stability, and the Role of Monetary Overhang in Forecasting Inflation in CEE Countries

Claudiu Tiberiu ALBULESCU Dominique Pepin 

Management Department, Politehnica University of Timisoara, 2, P-ta. Victoriei, Timisoara, Romania
CRIEF, University of Poitiers, 2, Rue Jean Carbonnier, Bât. A1 (BP 623), 86022, Poitiers, France
Corresponding Author: Claudiu Tiberiu ALBULESCU ,Tel: +40 743 089 759, Email:
Copyright ©2018 Journal of Economic Integration
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.

JEL Classification
E41: Demand for Money
E47: Forecasting and Simulation: Models and Applications
E52: Monetary Policy
F41: Open Economy Macroeconomics
Keywords: Monetary integration | Money demand stability | Monetary overhang | Inflation forecasts | Currency substitution | CEE countries
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