Expectations and the quantity equation – evidence from Eastern European countries

Abstract

This article analyses the usefulness of the quantity equation from the financial market’s view. We use more than 10 000 forecasts of financial analysts concerning projections of the growth rate of money supply, prices and real output for six Central and Eastern European countries to test whether they are internally consistent with the quantity equation. In particular, we report that forecasts are consistent with the quantity equation in high-inflation countries and high-inflation regimes.

Keywords:

• quantity equation
• forecasts
• Central and Eastern European countries

JEL Classification:

• C23
• E31
• E37

Acknowledgements

We are grateful to an anonymous referee and thank the ECB for providing the data.

Notes

1. ¹Thus, instead of directly asking financial market participants whether they believe in nominal or real effects, we analyse their ‘revealed beliefs’ uncovered by their forecasts.

2. ²The survey for Ukraine started in January 2000.

3. ³A complete list of participants is available upon request.

4. ⁴Further information concerning the survey can be found on the website: www.consensuseconomics.com

5. ⁵The time-invariant intercept α_t is estimated with time-fixed effects and includes the trend in the velocity of money. We decided to use this specification since we lack of data with respect to forecaster-specific expectations concerning the velocity.

6. ⁶The indices k and j reflect the forecast horizon measured in months (with k = j = 12, 11, …, 1 for the short-term model, and k + 12 = j = 24, 23, .., 13 for the forward-looking model).

7. ⁷Results based on other panel estimators are qualitatively similar and available upon request.