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Ex-ante dynamics of real effects of monetary policy: Theory and evidence for Poland and Russia, 2001-2003

  • Charemza , Wojciech W.

    (National Bank of Poland and University of Leicester, UK)

  • Makarov, Svetlana

    (European University at St. Petersburg, Russia and National Bank of Poland)

The paper proposes a new indicator of expected real effects of a policy aimed at controlling inflation. The indicator, called real effect of inflation targeting (REIT), involves the comparison of expected and output-neutral inflation. It is shown that it can be derived from a simple two-dimensional vector autoregressive model of inflation and output gap. The microdynamics of such model are explained in terms of the foundations of Taylor-type staggered wage contracts. It is assumed that the monetary authority has some discretion regarding the timing of monetary actions. Here REIT can be used to set the optimal times for such actions, if the control of output is regarded as a secondary policy target. A simulation experiment illustrates the rationale of such a device for timing monetary measures. The REIT has been used by the Polish Monetary Policy Council since 2001 in it's inflation targeting and is thought to have contributed to a substantial decline in Polish inflation in 2003 and to an increase in output growth in 2004. A similar indicator computed for Russia as a means of monitoring monetary policy rather than as an active tool confirms that active expansionary policy in 2002 and 2003 might have contributed to Russian economic growth in 2004 and 2005, whereas similar policy measures for 2004 are likely to prove ineffective.

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File URL: http://www.suomenpankki.fi/bofit_en/tutkimus/tutkimusjulkaisut/dp/Documents/dp2005.pdf
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Paper provided by Bank of Finland, Institute for Economies in Transition in its series BOFIT Discussion Papers with number 20/2005.

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Length: 32 pages
Date of creation: 30 Dec 2005
Date of revision:
Handle: RePEc:hhs:bofitp:2005_020
Contact details of provider: Postal: Bank of Finland, BOFIT, P.O. Box 160, FI-00101 Helsinki, Finland
Phone: + 358 10 831 2268
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  1. Mankiw, N. Gregory & Reis, Ricardo, 2003. "What Measure of Inflation Should a Central Bank Target?," Scholarly Articles 3415322, Harvard University Department of Economics.
  2. Christine Gartner & Gert Wehinger, 1998. "Core Inflation in Selected European Union Countries," Working Papers 33, Oesterreichische Nationalbank (Austrian Central Bank).
  3. Dixon, Huw David & Kara, Engin, 2007. "Persistence and Nominal Inertia in a Generalized Taylor Economy: How Longer Contracts Dominate Shorter Contracts," Cardiff Economics Working Papers E2007/1, Cardiff University, Cardiff Business School, Economics Section.
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  11. repec:nbr:nberre:0126 is not listed on IDEAS
  12. V. V. Chari & Patrick J. Kehoe & Ellen R. McGrattan, 1998. "Sticky price models of the business cycle: can the contract multiplier solve the persistence problem?," Staff Report 217, Federal Reserve Bank of Minneapolis.
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  18. Gert Wehinger, 2000. "Causes of Inflation in Europe, the United States and Japan: Some Lessons for Maintaining Price Stability in the EMU from a Structural VAR Approach," Empirica, Springer, vol. 27(1), pages 83-107, March.
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