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Monetary Policy Rules and Inflation Processes in Open Emerging Economies

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  • Borek Vasicek

Abstract

This paper has three objectives. First, it aims to reveal the logic of interest rate settings pursued by the monetary authorities of twelve new EU members. Using an estimation of an augmented Taylor rule, we find that central banks in countries with flexible exchange rates respond mainly to (expected) inflation, though often rather loosely. Countries with fixed exchange rates seem to apply an interest rate peg with the euro. Second, it sheds light on the inflation processes of these countries. To this end, we estimate an open economy Phillips curve (PC) and find that inflation rates are not only driven by backward persistency, but also have a forward-looking component. Finally, we assess the viability of existing monetary arrangements for price stability, using the conditional inflation variance obtained from a generalized autoregressive conditional heteroskedasticity estimation of the PC. We conclude that inflation targeting is preferable to an exchange rate peg because it allows for decreasing inflation rates as well as anchoring inflation volatility.

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Bibliographic Info

Article provided by M.E. Sharpe, Inc. in its journal Eastern European Economics.

Volume (Year): 48 (2010)
Issue (Month): 4 (January)
Pages: 36-58

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Handle: RePEc:mes:eaeuec:v:48:y:2010:i:4:p:36-58

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Web page: http://mesharpe.metapress.com/link.asp?target=journal&id=106044

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Citations

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Cited by:
  1. Borek Vasicek, 2010. "Is Monetary Policy in New Members States Asymmetric?," William Davidson Institute Working Papers Series wp1005, William Davidson Institute at the University of Michigan.
  2. Piotr Banbula & Witold Kozinski & Michal Rubaszek, 2011. "The role of the exchange rate in monetary policy in Poland," BIS Papers chapters, in: Bank for International Settlements (ed.), Capital flows, commodity price movements and foreign exchange intervention, volume 57, pages 285-295 Bank for International Settlements.
  3. Katarína Danišková & Jarko Fidrmuc, 2012. "Meta-Analysis of the New Keynesian Phillips Curve," Working Papers 314, Institut für Ost- und Südosteuropaforschung (Institute for East and South-East European Studies).
  4. Katarína Danišková & Jarko Fidrmuc, 2011. "Inflation Convergence and the New Keynesian, Phillips Curve in the Czech Republic," Working Papers 292, Institut für Ost- und Südosteuropaforschung (Institute for East and South-East European Studies).
  5. Borek Vašícek, 2011. "Inflation Dynamics and the New Keynesian Phillips Curve in Four Central European Countries," Emerging Markets Finance and Trade, M.E. Sharpe, Inc., vol. 47(5), pages 71-100, September.

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