Economic Models - Convex Optimization

174 Fabrizio Iacone and Renzo Orsi
developments: we think that because of these differences they are, together,
representative of the whole group of CEECs. For the euro-area, we took
Germany as the reference country.
2. Inflation Control over 1989–2004
2.1. Transition, Integration, and Accession
Although Poland, Czech Republic, and Slovenia shared the goals of implementing
a functioning market economy and of acceding to the EU, the
policies they implemented to reach them were rather different.
The first reason for the difference is in the productive structure at the
beginning of the transition. Yugoslavia established a quasi-market system
well before 1989, with quite independent firms and relatively hard budget
constraints; production was much more centralized and budget constraints
much softer in Poland and Czech Republic, and, to make things tougher for
these two countries, they also had to suffer the break-up of the council for
mutual economic assistance (CMEA), in which they were well integrated
(Czech Republic also had to endure the additional trade disruption, caused
by the separation from Slovakia). Poland and Czech Republic represent
an average position with respect to the general condition of the productive
structure of the CEECs at the beginning of the transition. Local differences
remain: for example, Hungary implemented some timid reforms before
1989, while the three Baltic countries experienced a much bigger shock,
because the disintegration of the Soviet Union resulted in the loss of their
largest trade partner. The stronger centralization, the softer budget constraint,
and the higher disruption caused by the break. up of the CMEA,
and of Czechoslovakia could have coeteris paribus caused a more turbulent
and longer transition for Poland and Czech Republic, but in reality Slovenia
had to face the major shock due to the collapse of Yugoslavia and of the
subsequent wars, which deprived the country of its biggest market and had
other adverse effects including the loss of revenues and hard currency due
to the fall of tourism.
A more precise ranking emerges when the size and the openness to
international trade is considered, with Poland being the largest country and
Slovenia the smallest one. As far as the monetary policies implemented for
inflation stabilization, all the CEECs except Slovenia, began their transition
with a strong commitment to a fixed exchange rate. The initial price
liberalization, in fact, left the system without a nominal anchor, and, also