CASE experts propose analytical tools for inflation modelling and forecasting inflation in Azerbaijan

CASE Network Studies and Analyses no 435 “Two Exercises of Inflation Modelling and Forecasting for Azerbaijan” prepared by Alexander Chubrik, Przemyslaw Wozniak and Gulnar Hajiyeva within the technical assistance project for the Ministry of Economic Development of Azerbaijan “Advisory Service in Macroeconomic Management and Institutional Reform” was implemented by CASE under the financial support of BP and partners in Azerbaijan.

The authors propose two econometric models of inflation for Azerbaijan: one based on monthly data and eclectic, another based on quarterly data and takes into account disequilibrium at the money market. Inflation regression based on monthly data showed that consumer prices dynamics is explained by money growth, exchange rate behaviour, commodities price dynamic and administrative changes in regulated prices. The authors come to the conclusion that both models give similar inflation projections, but sudden changes in money demand (2012) lead to significant differences between the projections. They show that money is the most important inflation determinant that explains up to 97.8% of CPI growth between 2012 and 2015, and that in order to keep inflation under control the Central Bank of Azerbaijan should link money supply to real non-oil GDP growth.

The purpose of the project, which is an extension of the ended Advisory Service on Macroeconomic Management and Institutional Reform at the Ministry of Economic Development (which started on 1 September 2008) was to provide high-quality policy advising and training services to the Ministry of Economic Development of the Republic of Azerbaijan with the aim of upgrading the quality of economic policy-making process in this country and enhancing the institutional and human resources capacity of this key government agency.