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Monetary Policy Transmission, Interest Rate Rules and Inflation Targeting in Three Transition Countries

  • Roberto Golinelli

    ()

    (Department of Economics, University of Bologna (Italy))

  • Riccardo Rovelli

    ()

    (Department of Economics, University of Bologna (Italy))

In 1991, the rate of inflation in the Czech Republic, Hungary and Poland was between 35% and 70%. At the end of 2001, it is below 8%. We setup a small structural macro model of these economies to explain the process of disinflation. Contrary to a widespread skepticism, which permeated a large part of previous research on these issues, we show that a simple open macroeconomic model, along the lines of Svensson (2000, Journal of International Economics), with forward-looking inflation and exchange rate expectations, can adequately characterize the relationship between the output gap, inflation, the real interest rate and the exchange rate during the course of transition. We use the estimated models to interpret the main features of monetary policy in each country and identify the channels of policy transmission. We characterize the policy rules and assess the relative importance of the interest rate channel (on aggregate demand) and the exchange rate channel (which affects both aggregate demand and supply) in determining the path of (dis)inflation. In the same context, we also tentatively analyze the consequences of attempting a faster path of disinflation. Finally, we evaluate the appropriateness of the inflation targeting framework which has been adopted recently in all three countries, and discuss to what extent it represents a discontinuity with the past.

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Paper provided by Free University Berlin, Jean Monnet Centre of Excellence in its series Eastward Enlargement of the Euro-zone Working Papers with number wp10.

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Length: 42 pages
Date of creation: 01 Aug 2002
Date of revision: 01 Aug 2002
Handle: RePEc:ezo:ezppap:wp10
Contact details of provider: Postal: Jean Monnet Centre of Excellence, Freie Universität Berlin, Ihnestrasse 22, D-14195 Berlin
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  9. Svensson, Lars E.O., 1998. "Open-Economy Inflation Targeting," Seminar Papers 638, Stockholm University, Institute for International Economic Studies.
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  19. Frederic S. Mishkin, 2000. "Inflation Targeting in Emerging-Market Countries," American Economic Review, American Economic Association, vol. 90(2), pages 105-109, May.
  20. Bofinger, Peter & Wollmershäuser, Timo, 2000. "Monetary policy and exchange rate targeting in open economies," W.E.P. - Würzburg Economic Papers 14, University of Würzburg, Chair for Monetary Policy and International Economics.
  21. Begg, David, 1998. "Pegging Out: Lessons from the Czech Exchange Rate Crisis," Journal of Comparative Economics, Elsevier, vol. 26(4), pages 669-690, December.
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  23. Eduard Hochreiter & Riccardo Rovelli, 2002. "The generation and distribution of central bank seigniorage in the Czech Republic, Hungary and Poland," Banca Nazionale del Lavoro Quarterly Review, Banca Nazionale del Lavoro, vol. 55(223), pages 391-415.
  24. Bofinger, Peter & Wollmershauser, Timo, 2001. "Is there a third way to EMU for the EU accession countries?," Economic Systems, Elsevier, vol. 25(3), pages 253-274, September.
  25. Tomasz Lyziak, 2002. "Monetary transmission mechanism in Poland.The strenght and delays," National Bank of Poland Working Papers 26, National Bank of Poland, Economic Institute.
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