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Relative inflation-forecast as monetary policy target for convergence to the euro

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  • Orlowski, Lucjan T.

Abstract

A monetary policy framework based on targeting a relative inflation-forecast is proposed for the economies converging to the euro. Such strategy aims at containing the differentials between the domestic and the implicit monetary union inflation-forecasts. Hence, these differentials become a basis for setting an operational policy target. The proposed framework can be viewed as an extension of flexible inflation targeting that prioritizes low and stable inflation over the exchange rate stability. It is believed to be consistent with the Maastricht convergence criteria and can be implemented in concurrence with the exchange rate stability benchmark for the ERM2. Several empirical tests are conducted to determine feasibility of adopting an instrument rule for the proposed policy framework in the three largest inflation-targeting candidates to the euro: the Czech Republic, Hungary and Poland. The stability tests as well as the volatility dynamics tests suggest that adoption of the relative inflation-forecast targeting framework is possible in these countries.

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Bibliographic Info

Article provided by Elsevier in its journal Journal of Policy Modeling.

Volume (Year): 30 (2008)
Issue (Month): 6 ()
Pages: 1061-1081

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Handle: RePEc:eee:jpolmo:v:30:y:2008:i:6:p:1061-1081

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Web page: http://www.elsevier.com/locate/inca/505735

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Keywords: Inflation targeting Exchange rate Monetary convergence ERM2 New EU member states GARCH;

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References

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Citations

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Cited by:
  1. Evžen Kočenda & Jan Hanousek, 2012. "State ownership and control in the Czech Republic," Economic Change and Restructuring, Springer, vol. 45(3), pages 157-191, August.
  2. Lucjan T. Orlowski, 2008. "Stages of the Ongoing Global Financial Crisis: Is There a Wandering Asset-Price Bubble?," CASE Network Studies and Analyses 0372, CASE-Center for Social and Economic Research.
  3. Hubert Gabrisch & Lucjan T. Orlowski, 2010. "Interest Rate Convergence in Euro-Candidate Countries: Volatility Dynamics of Sovereign Bond Yields," Emerging Markets Finance and Trade, M.E. Sharpe, Inc., vol. 46(6), pages 69-85, November.
  4. Hiranya Nath & Kiril Tochkov, 2013. "Relative inflation dynamics in the new EU member countries of Central and Eastern Europe," Empirical Economics, Springer, vol. 45(1), pages 1-22, August.
  5. Orlowski, Lucjan T., 2008. "Stages of the 2007/2008 Global Financial Crisis Is There a Wandering Asset-Price Bubble?," Economics Discussion Papers 2008-43, Kiel Institute for the World Economy.
  6. Rebeca Jiménez-Rodriguez & Amalia Morales-Zumaquero & Balazs Egert, 2010. "The VARying Effect of Foreign Shocks in Central and Eastern Europe," CESifo Working Paper Series 3080, CESifo Group Munich.
  7. Tigran Poghosyan & Evzen Kocenda, 2007. "Macroeconomic Sources of Foreign Exchange Risk in New EU Members," William Davidson Institute Working Papers Series wp898, William Davidson Institute at the University of Michigan.
  8. Orlowski, Lucjan T., 2012. "Financial crisis and extreme market risks: Evidence from Europe," Review of Financial Economics, Elsevier, vol. 21(3), pages 120-130.
  9. El-Shagi, Makram & Giesen, Sebastian, 2013. "Money and inflation: Consequences of the recent monetary policy," Journal of Policy Modeling, Elsevier, vol. 35(4), pages 520-537.
  10. Jiménez-Rodríguez, Rebeca & Morales-Zumaquero, Amalia & Égert, Balázs, 2010. "The effect of foreign shocks in Central and Eastern Europe," Journal of Policy Modeling, Elsevier, vol. 32(4), pages 461-477, July.
  11. Gabrisch, Hubert & Orlowski, Lucjan T. & Pusch, Toralf, 2012. "Sovereign default Risk in the Euro-Periphery and the Euro-Candidate Countries," MPRA Paper 41265, University Library of Munich, Germany.
  12. Lucjan T. Orlowski, 2008. "Monetary Policy Rules for Convergence to the Euro," CASE Network Studies and Analyses 0358, CASE-Center for Social and Economic Research.
  13. Evžen Koèenda & Tigran Poghosyan, 2010. "Exchange Rate Risk in Central European Countries," Czech Journal of Economics and Finance (Finance a uver), Charles University Prague, Faculty of Social Sciences, vol. 60(1), pages 22-39, February.

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