Title: Non-linear effects in the Croatian inflation-generating process

Authors: Ivana Lolić; Petar Sorić

Addresses: Faculty of Economics & Business Zagreb, Department of Statistics, University of Zagreb, Trg J.F. Kennedya 6 Zagreb, Croatia ' Faculty of Economics and Business Zagreb, Department of Statistics, Trg J.F. Kennedya 6, 10 000 Zagreb, Croatia

Abstract: The inflation-generating process in Croatia is extensively covered in the literature. However, two main shortcomings characterise the majority of these studies. First, none of them make the effort to directly measure inflation expectations and include them in the inflation model specification. Second, they completely disregard potential asymmetric effects in the Croatian inflation-generating process. This paper adds to the literature in terms of both mentioned niches. Inflation expectations are obtained directly through the consumer surveys. The smooth transition regression (STR) is applied to inspect for possible non-linearities in the Croatian Hybrid New Keynesian Phillips curve (NKPC). It is found that the pivotal role in the inflation-generating process can be assigned to expected inflation: as the inflation expectations increase, their effect on actual inflation significantly intensifies, while the impact of inflation persistence smoothly fades away. Inflation persistence is, however, also relevant, while the output gap parameters are not significant at all.

Keywords: STR; smooth transition regression; new Keynesian Phillips curve; inflation expectations; consumer surveys; nonlinear effects; Croatia; inflation generation; asymmetric effects.

DOI: 10.1504/IJMEF.2014.066483

International Journal of Monetary Economics and Finance, 2014 Vol.7 No.3, pp.175 - 191

Received: 05 Mar 2014
Accepted: 03 Jul 2014
Published online: 22 Dec 2014 *

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