Is Inflation a Monetary Phenomenon in the East European Economies? – Multifrequency Bayesian Quantile Inference

Abstract

This paper tries to determine how growth of money supply affects inflation in different time-horizons and under different inflati on levels in the Czech Republic, Poland, Hungary and Russia. The research is done by using two innovative methodologies – the wavelet approach and Bayesian q uantile regression. By observing these four countries, we can assess wheth er inflation targeting (IT) plays significant role in curbing inflation, becaus e three Visegrad group countries adopted IT almost two decades ago, while Russ ia tarted to conduct IT relatively recently. Estimated quantiles suggest th a money supply growth does not influence inflation in the Czech Republic and H ungary, whatsoever. We find that money growth impacts inflation in Poland, but very modestly. On the other hand, in the case of Russia, the transmission effec t rom money to inflation is much higher, and it goes around 40% in low infla tion conditions, when M1 aggregate is observed, and around 78% in low inflat ion conditions, when M3 aggregate is analysed. The overall results clearly indicate that the adoption of the IT framework as a disinflation strategy proved to be successful in the Visegrad group countries, since excessive money growth has little or no effect at all on inflation in these countries.