Current inflation, the dependent variable, is estimated as function of lagged inflation, which
captures the inflation inertia element; lagged growth rates of GDP, to capture excess demand
pressures; the nominal interest rate lagged one period and lagged growth in the M2 measure
of the money supply, to capture lags in the transmission of monetary policy; lagged
movements in the nominal effective exchange rate, which is intended to capture the degree of
pass-through from the exchange rate to domestic prices; and contemporaneous movements in
the import price deflator (taken to be an exogenous variable), to capture the importance of
imported goods, and in particular world food and commodity prices, in the domestic
consumption basket. All the variables—except for the nominal interest rate—are measured as
quarter-on-quarter percentage changes on seasonally adjusted data. The model also includes
dummy variables for structural changes, in 2007Q4 (Vietnam and India) or 2008Q3
(Philippines, Malaysia, Indonesia, and Thailand), in the intercept term. A single-period
dummy variable was also included for Indonesia for the fourth quarter of 2005 to reflect the
impact on inflation of a 127 percent rise in average retail fuel prices enacted on October 1,
2005.