The paper analyses a relationship between monetary aggregate M2 and inflation in a small open economy. The relationship between monetary expansion and inflation as well as the framework of dynamics income velocity of money in a small open economy are discussed in greater detail in the paper. The authors have developed a monetary model using the empirical verification of the relationship between monetary aggregate M2 and price development in tradable and non-tradable goods and services in the Czech Republic in the period 1996-2007. The empirical results of the model indicate that money has a significant impact on the price development of non-tradable goods and services.

Keywords: inflation, monetary model, monetary policy, cointegration analysis
JEL: C32, E52, F31, F41

  Martin Mandel, Vladimír Tomsik - Monetary Approach to Inflation - Model of Inflation in a Small Open Economy and its Application to the Czech Republic in the Period 1996-2007 - plik pdf; (411 KB)