Small Inflation Model of Mongolia (SIMOM)

This paper describes a preliminary version of the small inflation model of Mongolia (SIMOM). The intended primary use of the model is analysis of the monetary transmission mechanism and the inflation process in Mongolia, estimation of dynamic responses of selected variables to different shocks hitting the Mongolian economy as well as forecasting macroeconomic categories (e.g. exchange rate, output gap, inflation) over a medium term, consistent with the lags in the monetary transmission mechanism. Conclusions from the paper are the following: Mongolian inflation is driven by a large number of shocks, both internal and external. At the same time the effectiveness of the monetary transmission mechanism is relatively weak (although stronger than previously perceived). The exchange rate channel seems to be the most important channel of monetary transmission mechanism in Mongolia.