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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
Web page: http://www.jmc-berlin.org

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  2. Cukierman, Alex & Miller, Geoffrey P. & Neyapti, Bilin, 2002. "Central bank reform, liberalization and inflation in transition economies--an international perspective," Journal of Monetary Economics, Elsevier, vol. 49(2), pages 237-264, March.
  3. Kutan, Ali M. & Brada, Josef C., 1999. "The evolution of monetary policy in transition economies," ZEI Working Papers B 19-1999, ZEI - Center for European Integration Studies, University of Bonn.
  4. Jeffery D. Amato & Stefan Gerlach, 2001. "Inflation Targeting in Emerging Market and Transition Economies: Lessons after a Decade," Working Papers 132001, Hong Kong Institute for Monetary Research.
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  9. Svensson, L.E.O., 1998. "Open-Economy Inflation Targeting," Papers 638, Stockholm - International Economic Studies.
  10. 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.
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  17. Bohdan Klos & Ewa Wrobel, 2001. "The monetary transmission mechanism and the structural modelling of inflation at the National Bank of Poland," BIS Papers chapters, in: Bank for International Settlements (ed.), Modelling aspects of the inflation process and the monetary transmission mechanism in emerging market countries, volume 8, pages 232-251 Bank for International Settlements.
  18. Frederic S. Mishkin, 2000. "Inflation Targeting in Emerging Market Countries," NBER Working Papers 7618, National Bureau of Economic Research, Inc.
  19. 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.
  20. Lavan Mahadeva & Katerina Smidkova, 2004. "Modelling transmission mechanism of monetary policy in the Czech Republic," Macroeconomics 0402032, EconWPA.
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  23. Juselius, Katarina, 1992. "Domestic and foreign effects on prices in an open economy: The case of Denmark," Journal of Policy Modeling, Elsevier, vol. 14(4), pages 401-428, August.
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