Time Series Modeling of Inflation and its Volatility in Croatia

Abstract

Croatian National Bank is not targeting inflation but exchange rate as the nominal anchor or intermediary goal of monetary policy and inflation in Croatia is a dominantly foreign driven phenomenon. Using monthly data on CPI in Croatia from January 1997 up to November 2015, ARIMA (0,1,1) x (0,1,1)12 model is fitted as the one describing CPI behavior pattern and therefore reliable for CPI forecasting. Furthermore, to establish its volatility pattern several ARCH family models are tested and ARCH (1) model is found to be the best fitted one in explaining CPI volatility development in Croatia.