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Monetary and Non-Monetary Analyses of Inflation in a Small Open Country

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Smant, D., Melger, J. Monetary and Non-Monetary Analyses of Inflation in a Small Open Country. Credit and Capital Markets – Kredit und Kapital, 30(1), 52-80. https://doi.org/10.3790/ccm.30.1.52
Smant, David J. C. and Melger, Jeroen "Monetary and Non-Monetary Analyses of Inflation in a Small Open Country" Credit and Capital Markets – Kredit und Kapital 30.1, 1997, 52-80. https://doi.org/10.3790/ccm.30.1.52
Smant, David J. C./Melger, Jeroen (1997): Monetary and Non-Monetary Analyses of Inflation in a Small Open Country, in: Credit and Capital Markets – Kredit und Kapital, vol. 30, iss. 1, 52-80, [online] https://doi.org/10.3790/ccm.30.1.52
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Monetary and Non-Monetary Analyses of Inflation in a Small Open Country

Smant, David J. C. | Melger, Jeroen

Credit and Capital Markets – Kredit und Kapital, Vol. 30 (1997), Iss. 1 : pp. 52–80

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Article Details

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Duncker & Humblot
DOI
https://doi.org/10.3790/ccm.30.1.52
Language
Multiple languages
Pages
29

Author Details

David J. C. Smant, Rotterdam

Jeroen Melger, Rotterdam

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Abstract

Monetary and Non-Monetary Analyses of Inflation in a Small Open Country

This paper (re)evaluates monetary and non-monetary inflation models for the Netherlands. In particular, we examine whether a P-star model - representing a textbook macroeconomic relationship between money and prices - should be rejected in favour of a popular socio-political model based on cost-push factors. We argue that the P-star model can be used for a small economy with fixed exchange rates and conclude that the P-star model need not be rejected on theoretical grounds. We also show that based on in-sample fit and out-of-sample forecasting the monetary model is not outperformed by the socio-political model. Thus, the P-star model need not be rejected on empirical grounds. Basic monetary economics suggests that we should prefer the monetary inflation model. We conclude with some observations on the political-economy aspects of the public debate on inflation and its determinants

Table of Contents

Section Title Page Action Price
David J. C. Smant/Jeroen Melger: Monetary and Non-Monetary Analyses of Inflation\rin a Small Open Country 52
I. Introduction 52
II. P-Star and Socio-Political Models of Inflation 54
1. The P-Star Model 54
a) Dynamic Specification 55
b) Inflation Expectations 56
c) Small Open Economies with Fixed Exchange Rates 57
2. The Socio-Political Model 60
a) Necessary Monetary Validation in Cost-Push Theories of Inflation 62
b) Measuring the Exogenous Wage-Push Factor 62
III. Empirical Results 63
1. The P-Star Model 63
2. The Socio-Political Model 65
3. An Evaluation of the P-Star and Socio-Political Models 70
a) In-Sample Evaluation 70
b) Out-of-sample evaluation 73
IV. Concluding Remarks 74
References 77
Summary: Monetary and Non-Monetary Analyses of Inflation in a Small Open Country 79
Zusammenfassung: Monetäre und nichtmonetäre Inflationsanalysen in einem kleinen offenen Land 79
Résumé: Analyses monétaire et non-monétaire de l'inflation dans un petit pays ouvert 80

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