Economic Models - Convex Optimization

Topic 1
Inflation Control in Central and Eastern
European Countries
Fabrizio Iacone and Renzo Orsi
University of Bologna, Italy
1. Introduction
The recent accession to the European Union (EU) of 10 new members
officially opened the agenda of their participation in the European Monetary
Union (EMU) too.
Although, the accession of the new European partners to the euro-area
is formally analyzed, keeping the Maastricht criteria as the main reference,
these do not necessarily reflect the effective integration and convergence of
the economies. With this respect, we think it is important to study if and how
the Eurosystem can successfully control inflation after the extension of the
EMU: we then investigated the monetary policy transmission mechanism in
the Central and Eastern European Countries (CEECs) to see how compatible
it is with one of the current members of euro-area.
Knowledge of the mechanism of transmission of monetary policy is
also necessary to the CEECs to choose the monetary strategy for the period
preceding the accession to the euro-area. The discussion is open, both in
the literature and among monetary institutions, on whether a direct inflation
targeting or some kind of exchange rate commitment should be preferred:
by comparing the mechanism of transmission of policy impulses in different
regimes, we can see if a certain strategy made inflation control easier or
more difficult, and assess its cost by looking at the impact on the economic
activity.
We focused on Poland, Czech Republic, and Slovenia because they
are very different for the initial conditions from which they started the
transition to functioning market economies and later the integration in the
EU, for the relative size and the degree of openness to the international
trade, for the policies implemented in due course and even for their historical
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