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

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Author Info
Borek Vasicek () (Departament d'Economia Aplicada, Universitat Autonoma de Barcelona)

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

Find related papers by JEL classification:
E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
P24 - Economic Systems - - Socialist Systems and Transition Economies - - - National Income, Product, and Expenditure; Money; Inflation

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  1. Frömmel, Michael & Schobert, Franziska, 2006. "Monetary Policy Rules in Central and Eastern Europe," Diskussionspapiere der Wirtschaftswissenschaftlichen Fakultät der Universität Hannover dp-341, Universität Hannover, Wirtschaftswissenschaftliche Fakultät. [Downloadable!]
  2. Laurence M. Ball & Niamh Sheridan, 2003. "Does Inflation Targeting Matter?," IMF Working Papers 03/129, International Monetary Fund. [Downloadable!]
    Other versions:
  3. Benigno, Gianluca & Benigno, Pierpaolo & Ghironi, Fabio, 2007. "Interest rate rules for fixed exchange rate regimes," Journal of Economic Dynamics and Control, Elsevier, vol. 31(7), pages 2196-2211, July. [Downloadable!] (restricted)
    Other versions:
  4. Cho, Seonghoon & Moreno, Antonio, 2006. "A Small-Sample Study of the New-Keynesian Macro Model," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 38(6), pages 1461-1481, September. [Downloadable!] (restricted)
    Other versions:
  5. Batini, Nicoletta & Jackson, Brian & Nickell, Stephen, 2005. "An open-economy new Keynesian Phillips curve for the U.K," Journal of Monetary Economics, Elsevier, vol. 52(6), pages 1061-1071, September. [Downloadable!] (restricted)
  6. Jean Boivin & Marc P Giannoni, 2006. "Has Monetary Policy Become More Effective?," The Review of Economics and Statistics, MIT Press, vol. 88(3), pages 445-462, October. [Downloadable!] (restricted)
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  7. Gali, Jordi & Gertler, Mark, 1999. "Inflation dynamics: A structural econometric analysis," Journal of Monetary Economics, Elsevier, vol. 44(2), pages 195-222, October. [Downloadable!] (restricted)
    Other versions:
  8. Michal Franta & Branislav Saxa & Katerina Smidkova, 2007. "Inflation persistence - euro area and new EU Member States," Working Paper Series 810, European Central Bank. [Downloadable!]
  9. Ludger Linnemann & Andreas Schabert, 2006. "Monetary Policy and the Taylor Principle in Open Economies," International Finance, Blackwell Publishing, vol. 9(3), pages 343-367, December. [Downloadable!] (restricted)
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    Other versions:
  11. M. S. Mohanty & Marc Klau, 2004. "Monetary policy rules in emerging market economies: issues and evidence," BIS Working Papers 149, Bank for International Settlements. [Downloadable!]
  12. Johansen, Soren, 1991. "Estimation and Hypothesis Testing of Cointegration Vectors in Gaussian Vector Autoregressive Models," Econometrica, Econometric Society, vol. 59(6), pages 1551-80, November. [Downloadable!] (restricted)
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  14. Newey, Whitney K & West, Kenneth D, 1994. "Automatic Lag Selection in Covariance Matrix Estimation," Review of Economic Studies, Blackwell Publishing, vol. 61(4), pages 631-53, October. [Downloadable!] (restricted)
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  15. Clarida, Richard & Gali, Jordi & Gertler, Mark, 1998. "Monetary policy rules in practice Some international evidence," European Economic Review, Elsevier, vol. 42(6), pages 1033-1067, June. [Downloadable!] (restricted)
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  16. Balazs Egert & Dubravko Mihaljek, 2008. "Determinants of House Prices in Central and Eastern Europe," Working Papers 2008/1, Czech National Bank, Research Department. [Downloadable!]
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  17. Frommel, Michael & Schobert, Franziska, 2006. "Exchange rate regimes in Central and East European countries: Deeds vs. words," Journal of Comparative Economics, Elsevier, vol. 34(3), pages 467-483, September. [Downloadable!] (restricted)
  18. Mehra, Yash P., 2001. "The bond rate and estimated monetary policy rules," Journal of Economics and Business, Elsevier, vol. 53(4), pages 345-358. [Downloadable!] (restricted)
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