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Monetary Policy Conduct in Seven CESEE Countries on Their Road to the Euro

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Abstract

The objective of the paper is to examine whether monetary policy responses to inflation, output gap and exchange rate changed in seven countries of Central and South Eastern Europe between 1991 and 2010. Results suggest that monetary policy has been governed by: (i) three regimes in the Czech Republic and Poland – the initial pegging, the eclectic approach and inflation targeting; (ii) two similar regimes in Hungary – the approach with dual anchor; (iii) one main regime in the Baltics – the full subordination of monetary policy to the anchor currency; and (iv) one regime in Croatia – the orientation at maintaining stable exchange rate due to the banking system exposure to currency risk.

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Notes

  1. Some studies that estimate Taylor rules for those countries are: Maria-Dolores (2005); Paez-Farell (2007); Angeloni et al. (2007); Yilmazkuday (2008); Moons and Van Poeck (2008); Lukaszewicz (2007) and others.

  2. The number of regimes (states) has been determined empirically, by looking at the log-likelihood criterion. However, no more than three regimes have been tried, because in that case, the system did not converge due to the short sub-periods. However, as we will see in the results’ section, there is no indication that monetary policy has been governed by more than three regimes in any case.

  3. For instance, Latvia re-pegged its currency from SDR to the euro in 2004, while Lithuania from USD to the euro. In some countries, some of the instruments changed over the observed period. However, as we will see in the section ‘Empirical results’, these changes have not been picked up by the Markov-switching method, likely due to not exerting any effect on policy responses.

  4. Note that linearity was also rejected in the case of Hungary. Thus, despite a comparatively small persistence of regime 1, the non-linear (two-regime) model should be more informative than a simple linear (one-regime) specification. This applies to other cases identified later in the findings.

  5. In some cases, allowing for three regimes and an expanded set of endogenous variable led the system not to converge.

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Acknowledgements

The author thanks Branimir Jovanovic as well the anonymous referees for the useful comments on earlier drafts of this paper. All remaining errors are the author's.

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  1. School of Business Economics and Management, University American College Skopje, III Makedonska Brigada 60, Skopje, 1000, Macedonia

    Marjan Petreski

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APPENDIX

APPENDIX

Table A1

Table A1 Variables: definition and sources
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Table A2

Table A2 Augmented Dickey–Fuller test for the included variables
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Petreski, M. Monetary Policy Conduct in Seven CESEE Countries on Their Road to the Euro. Comp Econ Stud 55, 1–41 (2013). https://doi.org/10.1057/ces.2012.34

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