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Monetary policy rules and inflation process in open emerging economies: evidence for 12 new EU members

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  • Borek Vasícek

    ()
    (Departament d'Economia Aplicada, Universitat Autonoma de Barcelona)

Abstract

This paper has three objectives. First, it aims at revealing the logic of interest rate setting pursued by monetary authorities of 12 new EU members. Using estimation of an augmented Taylor rule, we find that this setting was not always consistent with the official monetary policy. Second, we seek to shed light on the inflation process of these countries. To this end, we carry out an estimation of an open economy Philips curve (PC). Our main finding is that inflation rates were not only driven by backward persistency but also held a forward-looking component. Finally, we assess the viability of existing monetary arrangements for price stability. The analysis of the conditional inflation variance obtained from GARCH estimation of PC is used for this purpose. We conclude that inflation targeting is preferable to an exchange rate peg because it allowed decreasing the inflation rate and anchored its volatility.

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Bibliographic Info

Paper provided by Department of Applied Economics at Universitat Autonoma of Barcelona in its series Working Papers with number wpdea0903.

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Length: 39 pages
Date of creation: May 2009
Date of revision:
Handle: RePEc:uab:wprdea:wpdea0903

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Keywords: open emerging economies; monetary policy rules; open economy Phillips curve; conditional inflation variance;

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Citations

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Cited by:
  1. Katarína Danišková & Jarko Fidrmuc, 2012. "Meta-Analysis of the New Keynesian Phillips Curve," Working Papers, Institut für Ost- und Südosteuropaforschung (Institute for East and South-East European Studies) 314, Institut für Ost- und Südosteuropaforschung (Institute for East and South-East European Studies).
  2. 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., M.E. Sharpe, Inc., vol. 47(5), pages 71-100, September.
  3. Borek Vasícek, 2010. "Is Monetary Policy in New Members States Asymmetric?," Working Papers, Department of Applied Economics at Universitat Autonoma of Barcelona wpdea1010, Department of Applied Economics at Universitat Autonoma of Barcelona.
  4. Sushanta Mallick & Ricardo Sousa, 2013. "Commodity Prices, Inflationary Pressures, and Monetary Policy: Evidence from BRICS Economies," Open Economies Review, Springer, Springer, vol. 24(4), pages 677-694, September.
  5. Katarína Danišková & Jarko Fidrmuc, 2011. "Inflation Convergence and the New Keynesian Phillips Curve in the Czech Republic," Czech Economic Review, Charles University Prague, Faculty of Social Sciences, Institute of Economic Studies, Charles University Prague, Faculty of Social Sciences, Institute of Economic Studies, vol. 5(2), pages 099-115, August.
  6. Piotr Banbula & Witold Kozinski & Michal Rubaszek, 2011. "The role of the exchange rate in monetary policy in Poland," BIS Papers chapters, Bank for International Settlements, in: Bank for International Settlements (ed.), Capital flows, commodity price movements and foreign exchange intervention, volume 57, pages 285-295 Bank for International Settlements.

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