Error Correction Model of Inflation in Mongolia

Abstract

This paper investigates the relationship between inflation, money and real output of Mongolia based on data from 1997 to 2006. The error correction model is used to establish the relationship. Causes for inflation would be explained by both approaches: non monetarist and monetarist. Results of the research indicate that there is the relationship between CPI, M2 and GDP. If the growth rate of the Mongolian economy is predictable, then a goal of long run price stability is feasible with the use of M2. In turn, low inflation would create an environment for more rapid economic growth.