Page 31 - Azerbaijan State University of Economics

THE JOURNAL OF ECONOMIC SCIENCES: THEORY AND PRACTICE, V.78, # 2, 2021, pp. 17-42

Apart from impulse response functions, we also estimate variance decomposition of
CPIs for each country. The estimations suggest that in Azerbaijan about a third of
variations in aggregate and food CPI, and more than half of variation in non-food
CPI are explained by exchange rate shocks. However, exchange rate shocks explain
only 6 percent of variations in service CPI.

The major policy implications of the paper are the following. Considering the
greater ERPT, the policy makers should carefully consider its lag and size effects on
monetary policy decisions, since it will take time for NEER shocks to have the
maximum effect on domestic CPI. Also, a move toward inflation targeting regime
increases the relevance of the ERPT in improving forecasting capabilities of the
structural models used at the central banks.

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