Modeling the evolution of monetary policy rules in CESEE

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.