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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

For corrections or technical questions regarding this item, or to correct its listing, contact: (Jeroen Loos).

Related research

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

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Cited by:
  1. 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.
  2. Orlowski, Lucjan T, 2008. "Stages of the 2007/2008 Global Financial Crisis: Is There a Wandering Asset-Price Bubble?," MPRA Paper 12696, University Library of Munich, Germany.
  3. Rebeca Jimenez-Rodriguez & Amalia Morales-Zumaquero & Balazs Egert, 2010. "The VARying Effect of Foreign Shocks in Central and Eastern Europe," William Davidson Institute Working Papers Series wp989, William Davidson Institute at the University of Michigan.
  4. Evžen Kocenda & Jan Hanousek, 2009. "State Ownership and Control in the Czech Republic," CESifo Working Paper Series 2801, CESifo Group Munich.
  5. Evžen Kočenda & 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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