| Abstract: |
This paper examines the relationship between money and prices in Estonia in
the period 1997Q1-2003Q3. The concept of a price (or real money) gap suggested
by the P-star theory is applied to investigate whether information about the
current money stock can be used to explain and/or predict GDP deflator
inflation over the sample period. The results show that the money gap measure
dominates the output gap as an explanatory variable for inflation in the short
run. However, the money gap does not seem to be a proper indicator for
predicting inflation over longer horizons, say, 12 months ahead. There are
some signs that the output gap is becoming a better indicator of future
inflation over time, but more data are needed to confirm this hypothesis. |