On the Long Run Money-Prices Relationship in CEE Countries

Abstract En

We investigate the role of money in explaining the long run inflation in 12 CEE countries, using monthly data for the period 2004-2013. We use a panel cointegration approach and recently developed empirical techniques as the panel fully modified and the panel dynamic regression procedures. Beside the role of interest rate and economic growth rate in explaining inflation, our cointegration equation explores the role of broad money (M2) growth. We also look to the M2 components, namely M1 and the difference between M2 and M1. We find no cointegration relationship either for the broad money or for the narrow money. However, money created by the banking sector explains the inflation in CEE countries in the long run. This last finding characterizes the entire panel, the panel of the seven CEE countries candidates to the Euro area, but not the panel of Euro area members. The findings are robust regarding the consideration of the income velocity’s impact on the money in circulation.

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