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Modeling the evolution of monetary policy rules in CESEE

Author

Listed:
  • Martin Feldkircher

    () (Oesterreichische Nationalbank, Foreign Research Division)

  • Florian Huber

    () (Vienna University of Economics and Business (WU))

  • Isabella Moder

    () (Foreign Research Division)

Abstract

In this paper we use a novel econometric approach to estimate time-varying monetary policy rules for four inflation-targeting economies in Central, Eastern and Southeastern Europe (CESEE). Our results indicate that monetary policy in the Czech Republic, Hungary, Poland and Romania is strongly anchored to inflation stabilization, which implies that these economies follow a comparatively strict version of inflation targeting. By contrast, there is less evidence for output stabilization playing an important role in the conduct of monetary policy. Other factors that are of relevance in the monetary policy reaction function include the short-term interest rate in the euro area and – depending on the country under consideration – a measure of exchange rate movements. We find that the coefficients on domestic inflation expectations and euro area interest rates have declined since the mid-2000s, but that they still play an important role in central banks’ reaction functions. This decline in the size of estimated coefficients may mirror an international environment characterized by loose and unconventional monetary policies that cannot be appropriately captured by euro area interest rates. It may also reflect contained global and domestic price growth.

Suggested Citation

  • 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.
  • Handle: RePEc:onb:oenbfi:y:2016:i:1:b:1
    as

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    References listed on IDEAS

    as
    1. Borek Vasicek, 2010. "Monetary Policy Rules and Inflation Processes in Open Emerging Economies," Eastern European Economics, Taylor & Francis Journals, vol. 48(4), pages 36-58, January.
    2. 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.
    3. Aizenman, Joshua & Hutchison, Michael & Noy, Ilan, 2011. "Inflation Targeting and Real Exchange Rates in Emerging Markets," World Development, Elsevier, vol. 39(5), pages 712-724, May.
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    1. repec:ksa:szemle:1744 is not listed on IDEAS
    2. repec:pal:compes:v:59:y:2017:i:4:d:10.1057_s41294-017-0035-3 is not listed on IDEAS

    More about this item

    Keywords

    time-varying parameter model; monetary policy; Taylor rule;

    JEL classification:

    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • C11 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Bayesian Analysis: General
    • C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes

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