New Europe Weekly

Inflation is a monetary phenomenon − Also in CEE

Fri, Jun 6 2008, 10:24 GMT
by Danske Research Team

Danske Bank A/S


Inflation has risen dramatically all over Central & Eastern Europe over the last year. It is easy to point to rising food and energy prices and the acceleration in wage growth across the region as an explanation for the rise in inflation. We do however, not believe that one should jump to the conclusion that the rise in inflation is just a "supply phenomenon".

Rather we would remind the reader that the Nobel prize laureate in economics, Milton Friedman, famously remarked that "inflation is always and everywhere a monetary phenomenon”. If one looks at the development in money supply growth in CEE over the last decade, it becomes clear that Friedman's famous statement also applies to the CEE. As the graph on the left illustrates, there seems to be a fairly high correlation between money supply growth and inflation.

Indeed inflation over the last decade has been highest in the countries where money supply growth has been the highest – Russia and Ukraine – while inflation has been the lowest in countries like Slovenia and Poland, where money growth have been the lowest. These correlations of course do not say anything about causality between money and prices or for that matter about the importance of different monetary and exchange rate regimes, but they do nonetheless suggest that monetary policy plays a key role for the development of inflation in CEE, and ultimately there is only one way of bringing down inflation and that is through tighter monetary policy.

Published on  Fri, Jun 6 2008, 10:28 GMT

Archive

Danske Bank  | Holmens Kanal 2-12, DK-1092 Copenhagen
http://www.danskebank.com/ | danskeresearch@danskebank.com

Legal disclaimer and risk disclosure

This publication has been prepared by Danske Bank for information purposes only. It is not an offer or solicitation of any offer to purchase or sell any financial instrument. Whilst reasonable care has been taken to ensure that its contents are not untrue or misleading, no representation is made as to its accuracy or completeness and no liability is accepted for any loss arising from reliance on it. Danske Bank, its affiliates or staff, may perform services for, solicit business from, hold long or short positions in, or otherwise be interested in the investments (including derivatives), of any issuer mentioned herein. Danske Bank's research analysts are not permitted to invest in securities under coverage in their research sector. This publication is not intended for private customers in the UK or any person in the US. Danske Bank A/S is regulated by the FSA for the conduct of designated investment business in the UK and is a member of the London Stock Exchange. Copyright () Danske Bank A/S. All rights reserved. This publication is protected by copyright and may not be reproduced in whole or in part without permission.

Interested in forex trading? forex brokerage firms!


Forex Capital Markets, LLC (FXCM)
Contact the broker/FDM
Open a demo account
FOREX.com
Contact the broker/FDM
Open a demo account
IG Markets
Contact the broker/FDM
Open a demo account		Easy-Forex™ Trading Platform
Contact the broker/FDM		Crown Forex SA
Contact the broker/FDM
Open a demo account

FXstreet.com will give you a 3 months membership as soon as minimum rebates have been generated (€150 for private trader/ €300 for corporate trader)

[Read Premium full description]


Note: All information on this page is subject to change. The use of this website constitutes acceptance of our user agreement. Please read our privacy policy and legal disclaimer.

Opinions expressed at FXstreet.com are those of the individual authors and do not necessarily represent the opinion of FXstreet.com or its management.

Risk Disclosure: Trading foreign exchange on margin carries a high level of risk, and may not be suitable for all investors. The high degree of leverage can work against you as well as for you. Before deciding to invest in foreign exchange you should carefully consider your investment objectives, level of experience, and risk appetite. The possibility exists that you could sustain a loss of some or all of your initial investment and therefore you should not invest money that you cannot afford to lose. You should be aware of all the risks associated with foreign exchange trading, and seek advice from an independent financial advisor if you have any doubts.

©2008 "FXstreet.com. The Forex Market" All Rights Reserved.