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The Impact of Monetary Policy Institutional Decisions on Convergence in Central and Eastern European Countries

Author

Listed:
  • Gyorgy Szapary

    (Magyar Nemzeti Bank, Budapest Metropolitan University)

  • Balazs Vonnak

    (Magyar Nemzeti Bank, Budapest Metropolitan University)

Abstract

Our study looks at the role of monetary policy related institutional decisions in the nominal and real convergence of the 11 former socialist Central and Eastern European EU Member States over the three decades following their regime change. We use our empirical model to estimate the impact of four key drivers of the monetary policy framework (exchange rate regime, central bank independence, inflation targeting, euro adoption) on inflation and real economic growth. Our main finding is that the convergence rate over the past decades has had little to do with the choice of exchange rate regime or the potential adoption of the euro or inflation targeting and much more with the establishment of central bank independence. The latter has reduced inflation by roughly 5 percentage points, while boosting real GDP growth by about 2 percentage points. This suggests that central bank independence significantly enhances the credibility and predictability of monetary policy and largely determines the success of each monetary regime.

Suggested Citation

  • Gyorgy Szapary & Balazs Vonnak, 2024. "The Impact of Monetary Policy Institutional Decisions on Convergence in Central and Eastern European Countries," Financial and Economic Review, Magyar Nemzeti Bank (Central Bank of Hungary), vol. 23(4), pages 120-152.
    • Handle: RePEc:mnb:finrev:v:23:y:2024:i:4:p:120-152
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    More about this item

    Keywords

    monetary policy; convergence; institutions; inflation; economic growth;
    All these keywords.

    JEL classification:

    • C33 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Models with Panel Data; Spatio-temporal Models
    • E42 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Monetary Sytsems; Standards; Regimes; Government and the Monetary System
    • E65 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Studies of Particular Policy Episodes
    • O43 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - Institutions and Growth

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