IDEAS home Printed from https://ideas.repec.org/a/onb/oenbfi/y2011i3b3.html
   My bibliography  Save this article

A Markov Switch to Inflation Targeting in Emerging Market Peggers with a Focus on the Czech Republic, Poland and Hungary

Author

Listed:
  • Marjan Petreski

    (University American College Skopje)

Abstract

The objective of this paper is to empirically examine if monetary policy conduct has significantly changed in nine emerging economies, including the Czech Republic, Poland and Hungary, after the switch from exchange rate targeting to inflation targeting. An augmented Taylor rule is estimated with a Markov switching method for each of the nine countries on the basis of monthly data over the period from the early 1990s to end-2009. In general, the results suggest that inflation targeting represented a real switch in eight emerging economies. We identified the following differences for the period of inflation targeting compared to the preceding period of exchange rate targeting: (1) The economic environment became more stable; (2) the central bank’s reaction to inflation deviations from the target moderated (as it was probably possible to share the burden of inflationary pressures between interest rate increases and currency depreciations); (3) the central bank’s response to the output gap also moderated although it was statistically significant in only half of the countries; this is an indication of strict inflation targeting whereby meeting the inflation target is the primary objective. For the Czech Republic and Poland, an intermediate regime is identified, which is associated with the economic developments in these two countries prior to establishing a full-fledged inflation targeting regime. For Hungary, we identified only one regime, which is likely to reflect the combined strategy of targeting both the exchange rate and inflation that the country followed nearly over the entire period under review.

Suggested Citation

  • Marjan Petreski, 2011. "A Markov Switch to Inflation Targeting in Emerging Market Peggers with a Focus on the Czech Republic, Poland and Hungary," Focus on European Economic Integration, Oesterreichische Nationalbank (Austrian Central Bank), issue 3, pages 57-75.
  • Handle: RePEc:onb:oenbfi:y:2011:i:3:b:3
    as

    Download full text from publisher

    File URL: https://www.oenb.at/dam/jcr:c75e57fb-7124-46c0-a843-f8b40d43aa92/feei_2011_q3_studies_03_tcm16-237367.pdf
    Download Restriction: no
    ---><---

    References listed on IDEAS

    as
    1. Creel, Jérôme & Hubert, Paul, 2015. "Has Inflation Targeting Changed The Conduct Of Monetary Policy?," Macroeconomic Dynamics, Cambridge University Press, vol. 19(1), pages 1-21, January.
    2. Jerome Creel & Paul Hubert, 2008. "Has the Adoption of Inflation Targeting Represented a Regime Switch? Empirical evidence from Canada, Sweden and the UK," Documents de Travail de l'OFCE 2008-25, Observatoire Francais des Conjonctures Economiques (OFCE).
    3. Andrew Ang & Geert Bekaert, 2002. "International Asset Allocation With Regime Shifts," Review of Financial Studies, Society for Financial Studies, vol. 15(4), pages 1137-1187.
    4. Richard Clarida & Jordi Galí & Mark Gertler, 2000. "Monetary Policy Rules and Macroeconomic Stability: Evidence and Some Theory," The Quarterly Journal of Economics, Oxford University Press, vol. 115(1), pages 147-180.
    5. Carmen M. Reinhart & Kenneth S. Rogoff, 2004. "The Modern History of Exchange Rate Arrangements: A Reinterpretation," The Quarterly Journal of Economics, Oxford University Press, vol. 119(1), pages 1-48.
    6. repec:zbw:bofitp:2004_011 is not listed on IDEAS
    7. Guy Debelle, 1999. "Inflation Targeting and Output Stabilisation," RBA Research Discussion Papers rdp1999-08, Reserve Bank of Australia.
    8. Marjan Petreski, 2010. "Exchange-rate regimes and output volatility: empirical investigation with panel data," International Journal of Monetary Economics and Finance, Inderscience Enterprises Ltd, vol. 3(1), pages 69-99.
    9. Stephen G. Cecchetti & Michael Ehrmann, 2002. "Does Inflation Targeting Increase Output Volatility?: An International Comparison of Policymakers' Preferences and Outcomes," Central Banking, Analysis, and Economic Policies Book Series, in: Norman Loayza & Klaus Schmidt-Hebbel & Norman Loayza (Series Editor) & Klaus Schmidt-Hebbel (Series (ed.),Monetary Policy: Rules and Transmission Mechanisms, edition 1, volume 4, chapter 9, pages 247-274, Central Bank of Chile.
    10. M. S. Mohanty & Marc Klau, 2005. "Monetary Policy Rules in Emerging Market Economies: Issues and Evidence," Springer Books, in: Rolf J. Langhammer & Lúcio Vinhas Souza (ed.), Monetary Policy and Macroeconomic Stabilization in Latin America, pages 205-245, Springer.
    11. Christopher A. Sims & Tao Zha, 2006. "Were There Regime Switches in U.S. Monetary Policy?," American Economic Review, American Economic Association, vol. 96(1), pages 54-81, March.
    12. Miroslav Hrncir & Katerina Smidkova, 2004. "Inflation targeting in the Czech Republic," Macroeconomics 0402031, University Library of Munich, Germany.
    13. Diebold, Francis X & Rudebusch, Glenn D, 1996. "Measuring Business Cycles: A Modern Perspective," The Review of Economics and Statistics, MIT Press, vol. 78(1), pages 67-77, February.
    14. Frankel, Jeffrey A, 1979. "On the Mark: A Theory of Floating Exchange Rates Based on Real Interest Differentials," American Economic Review, American Economic Association, vol. 69(4), pages 610-622, September.
    15. Svensson, Lars E. O., 2000. "Open-economy inflation targeting," Journal of International Economics, Elsevier, vol. 50(1), pages 155-183, February.
    16. Marjan Petreski, 2009. "A Critique On Inflation Targeting," Journal Articles, Center For Economic Analyses, pages 11-24, December.
    17. Hamilton, James D, 1989. "A New Approach to the Economic Analysis of Nonstationary Time Series and the Business Cycle," Econometrica, Econometric Society, vol. 57(2), pages 357-384, March.
    18. Frederic S. Mischkin & Adam S. Posen, 1998. "Cílování inflace: zkušenosti ètyø zemí (Inflation Targeting - Lessons from Four Countries)," Czech Journal of Economics and Finance (Finance a uver), Charles University Prague, Faculty of Social Sciences, vol. 48(4), pages 252-294, April.
    19. John B. Taylor, 2001. "The Role of the Exchange Rate in Monetary-Policy Rules," American Economic Review, American Economic Association, vol. 91(2), pages 263-267, May.
    20. Rudebusch, Glenn D., 2002. "Term structure evidence on interest rate smoothing and monetary policy inertia," Journal of Monetary Economics, Elsevier, vol. 49(6), pages 1161-1187, September.
    21. Matteo Pelagatti, 2003. "Duration Dependent Markov-Switching Vector Autoregression: Properties, Bayesian Inference, Software and Application," Working Papers 20051101, Università degli Studi di Milano-Bicocca, Dipartimento di Statistica, revised Nov 2005.
    22. Morris Goldstein, 2002. "Managed Floating Plus," Peterson Institute Press: All Books, Peterson Institute for International Economics, number pa66, October.
    23. Gill Hammond, 2012. "State of the art of inflation targeting," Handbooks, Centre for Central Banking Studies, Bank of England, edition 4, number 29, April.
    24. Frederic S. Mishkin & Adam S. Posen, 1997. "Inflation targeting: lessons from four countries," Economic Policy Review, Federal Reserve Bank of New York, vol. 3(Aug), pages 9-110.
    25. Taylor, John B. (ed.), 2001. "Monetary Policy Rules," National Bureau of Economic Research Books, University of Chicago Press, edition 1, number 9780226791258, October.
    26. Kim, Chang-Jin & Piger, Jeremy & Startz, Richard, 2008. "Estimation of Markov regime-switching regression models with endogenous switching," Journal of Econometrics, Elsevier, vol. 143(2), pages 263-273, April.
    27. Goldfeld, Stephen M. & Quandt, Richard E., 1973. "A Markov model for switching regressions," Journal of Econometrics, Elsevier, vol. 1(1), pages 3-15, March.
    28. Cecchetti, Stephen G & Lam, Pok-sang & Mark, Nelson C, 1990. "Mean Reversion in Equilibrium Asset Prices," American Economic Review, American Economic Association, vol. 80(3), pages 398-418, June.
    29. Leonardo Leiderman & Rodolfo Maino & Eric Parrado, 2006. "Inflation Targeting in Dollarized Economies," Working Papers Central Bank of Chile 368, Central Bank of Chile.
    30. Petreski, Marjan, 2009. "Analysis of exchange-rate regime effect on growth: theoretical channels and empirical evidence with panel data," Economics Discussion Papers 2009-49, Kiel Institute for the World Economy (IfW Kiel).
    31. Ravn, Morten O. & Sola, Martin, 1995. "Stylized facts and regime changes: Are prices procyclical?," Journal of Monetary Economics, Elsevier, vol. 36(3), pages 497-526, December.
    32. Robert B. Davies, 2002. "Hypothesis testing when a nuisance parameter is present only under the alternative: Linear model case," Biometrika, Biometrika Trust, vol. 89(2), pages 484-489, June.
    33. Lars E O Svensson, 1997. "Inflation targeting in an open economy: strict or flexible inflation targeting?," Reserve Bank of New Zealand Discussion Paper Series G97/8, Reserve Bank of New Zealand.
    34. Andres Velasco & Roberto Chang, 2000. "Exchange-Rate Policy for Developing Countries," American Economic Review, American Economic Association, vol. 90(2), pages 71-75, May.
    35. Giorgio Valente, 2003. "Monetary policy rules and regime shifts," Applied Financial Economics, Taylor & Francis Journals, vol. 13(7), pages 525-535.
    36. Mr. Scott Roger, 2009. "Inflation Targeting at 20 - Achievements and Challenges," IMF Working Papers 2009/236, International Monetary Fund.
    37. Taylor, John B., 1993. "Discretion versus policy rules in practice," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 39(1), pages 195-214, December.
    38. Eichengreen, B. & Masson, P. & Savastano, M. & Sharma, S., 1999. "Transition Strategies and Nominal Anchors on the Road to Greater Exchange-Rate Flexibility," Princeton Essays in International Economics 213, International Economics Section, Departement of Economics Princeton University,.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Petreski, Marjan, 2013. "Inflation targeting at the crossroads: Evidence from post-communist economies during the crisis," MPRA Paper 47018, University Library of Munich, Germany.
    2. Martin Feldkircher & Florian Huber & Isabella Moder, 2016. "Modeling the evolution of monetary policy rules in CESEE," Focus on European Economic Integration, Oesterreichische Nationalbank (Austrian Central Bank), issue 1, pages 8-27.
    3. Lupu, Dan & Asandului, Mircea & Sîrghi, Nicoleta, 2015. "Considerations regarding inflation's evolution in Central and Eastern European countries," MPRA Paper 95508, University Library of Munich, Germany.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Marjan Petreski, 2010. "An Overhaul of a Doctrine: Has Inflation Targeting Opened a New Era in Developing-country Peggers?," FIW Working Paper series 057, FIW.
    2. Marjan Petreski, 2009. "A Critique On Inflation Targeting," Journal Articles, Center For Economic Analyses, pages 11-24, December.
    3. Caporale, Guglielmo Maria & Helmi, Mohamad Husam & Çatık, Abdurrahman Nazif & Menla Ali, Faek & Akdeniz, Coşkun, 2018. "Monetary policy rules in emerging countries: Is there an augmented nonlinear taylor rule?," Economic Modelling, Elsevier, vol. 72(C), pages 306-319.
    4. Nikola Fabris & Milena Lazić, 2022. "Evaluating the Role of the Exchange Rate in Monetary Policy Reaction Function of Advanced and Emerging Market Economies," Journal of Central Banking Theory and Practice, Central bank of Montenegro, vol. 11(2), pages 77-96.
    5. Benlialper, Ahmet & Cömert, Hasan & Öcal, Nadir, 2017. "Asymmetric exchange rate policy in inflation targeting developing countries," IPE Working Papers 86/2017, Berlin School of Economics and Law, Institute for International Political Economy (IPE).
    6. Hurn Stan & Johnson Nicholas & Silvennoinen Annastiina & Teräsvirta Timo, 2022. "Transition from the Taylor rule to the zero lower bound," Studies in Nonlinear Dynamics & Econometrics, De Gruyter, vol. 26(5), pages 635-647, December.
    7. Marjan Petreski, 2013. "Overhaul of a Doctrine," Eastern European Economics, Taylor & Francis Journals, vol. 51(5), pages 46-68, September.
    8. Baxa, Jaromír & Horváth, Roman & Vašíček, Bořek, 2014. "How Does Monetary Policy Change? Evidence On Inflation-Targeting Countries," Macroeconomic Dynamics, Cambridge University Press, vol. 18(3), pages 593-630, April.
    9. Jesus M. Garcia-Iglesias & Rebeca Muñoz Torres & George Saridakis, 2013. "Did the Bank of Mexico follow a systematic behaviour in its transition to an inflation targeting regime?," Applied Financial Economics, Taylor & Francis Journals, vol. 23(14), pages 1205-1213, July.
    10. Siregar, Reza Yamora & Goo, Siwei, 2010. "Effectiveness and commitment to inflation targeting policy: Evidence from Indonesia and Thailand," Journal of Asian Economics, Elsevier, vol. 21(2), pages 113-128, April.
    11. Carlos Garcia & Jorge Restrepo & Mr. Scott Roger, 2009. "Hybrid Inflation Targeting Regimes," IMF Working Papers 2009/234, International Monetary Fund.
    12. Garcia, Carlos J. & Restrepo, Jorge E. & Roger, Scott, 2011. "How much should inflation targeters care about the exchange rate?," Journal of International Money and Finance, Elsevier, vol. 30(7), pages 1590-1617.
    13. Hutchison, Michael M. & Sengupta, Rajeswari & Singh, Nirvikar, 2013. "Dove or Hawk? Characterizing monetary policy regime switches in India," Emerging Markets Review, Elsevier, vol. 16(C), pages 183-202.
    14. Utso Pal Mustafi & Rajeswari Sengupta, 2020. "Regime changes in Indias monetary policy and Tenures of RBI governors," Indira Gandhi Institute of Development Research, Mumbai Working Papers 2020-011, Indira Gandhi Institute of Development Research, Mumbai, India.
    15. Carlos García & Jorge Restrepo & Scott Roger, 2009. "Hybrid Inflation Targeting Regimes," Working Papers Central Bank of Chile 533, Central Bank of Chile.
    16. Akosah, Nana Kwame & Alagidede, Imhotep Paul & Schaling, Eric, 2020. "Testing for asymmetry in monetary policy rule for small-open developing economies: Multiscale Bayesian quantile evidence from Ghana," The Journal of Economic Asymmetries, Elsevier, vol. 22(C).
    17. Pardo, S. & Rautureau, N. & Vallée, T., 2011. "Optimal versus realized policy rules in a regime-switching framework," Economic Modelling, Elsevier, vol. 28(6), pages 2761-2775.
    18. Baxa, Jaromír & Horváth, Roman & Vašíček, Bořek, 2013. "Time-varying monetary-policy rules and financial stress: Does financial instability matter for monetary policy?," Journal of Financial Stability, Elsevier, vol. 9(1), pages 117-138.
    19. Käfer Benjamin, 2014. "The Taylor Rule and Financial Stability – A Literature Review with Application for the Eurozone," Review of Economics, De Gruyter, vol. 65(2), pages 159-192, August.
    20. Hutchison, Michael & Sengupta, Rajeswari & Singh, Nirvikar, 2011. "Dove or Hawk? characterizing monetary regime switches during financial liberalization in India," MPRA Paper 30423, University Library of Munich, Germany.

    More about this item

    Keywords

    monetary regime switch; inflation targeting; CESEE-3; Markov switching;
    All these keywords.

    JEL classification:

    • E42 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Monetary Sytsems; Standards; Regimes; Government and the Monetary System
    • 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

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:onb:oenbfi:y:2011:i:3:b:3. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Elisabeth Beckmann (email available below). General contact details of provider: https://edirc.repec.org/data/oenbbat.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.