Work detail

Comparison of the inflation prediction approaches: Monetary growth vs. Output gap analysis

Author: Mgr. Veronika Kuliková
Year: 2013 - summer
Leaders: prof. Roman Horváth Ph.D.
Consultants:
Work type: Finance, Financial Markets and Banking
Masters
Language: English
Pages: 66
Awards and prizes:
Link:
Abstract: Inflation is one of the often used monetary indicators in conducting monetary
policy. Even though money supply is an essential determinant of inflation, it
is not used in inflation modeling. Currently, output gap is considered as most
predicative variable.
This thesis brings the empirical evidence on the hypothesis of money supply
carrying more information on estimating inflation than the output gap. It
is provided on the case of 16 developed European economies using Bayesian
Model Averaging (BMA). BMA is a comprehensive approach that deals with
the model uncertainty and thus solves the variable selection problem. The
results of analysis confirmed that money supply includes more information of
inflation than the output gap and thus should be used in inflation modeling.
These outcomes are robust towards prior selection and high correlation of some
variables.

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