Economic Models - Convex Optimization

Inflation Control in Central and Eastern European Countries 177
Hungarian experience: when the two objectives were in conflict, as in June
2003, one had to be abandoned, and a devaluation took place.
Since the accession to the EU also required the complete adoption of
the acquis communautaire, thereby including the elimination of capital
controls, the apparent paradox of several CEECs switching to a free float
and inflation targeting, for the period preceding the adoption of the euro,
is then a strategy that may protect their currencies from unrealistic parities
and speculative attacks.
On the other hand, a direct inflation targeting can only be successful if
the monetary authority has earned itself a solid reputation, and this primarily
requires the independence from any political interference. Since the CEECs
only acquired a formal central bank independence in the last few years, as a
part of the process of adoption of the acquis communautaire, their credibility
may still be weak. Central bank independence is even more a concern,
when the definition is extended beyond the mere legal requirement: in most
of the cases for example, the credibility was seriously weakened because
the fiscal authority had the opportunity to partially finance its expenditures
through the central bank; political pressures, as experienced in the Czech
Republic and in Poland, may undermine the credibility of the central bank
even when they are resisted, because they may erode the consensus in
the country. Several indices of central bank independence, were proposed
in the literature: according to Maliszewski (2000), and to the extensive
survey in Dvorsky (2000), the CEECs were lagging behind with respect
to their Western counterparts, Poland and the Czech Republic faring better
than Slovenia. Indeed, it is exactly because the credibility of the monetary
authorities is lower in the CEECs that Amato and Gerlach (2002) proposed
to supplement the inflation targeting with a mild monetary commitment,
this would increase the information in the market.
It is then important to ascertain if the exchange rate commitment is a
risk worth taking, not only for the countries on the way to EMU that are still
more than two years away from the formal discussion of their convergence
according to the Maastricht criteria, but also for other emerging economies
in the world.
2.3. A Summary of the Results of Previous Analyses
Several empirical analyses on inflation control in CEECs appeared in the
recent years. Iacone and Orsi (2004) surveyed many applied works: these
varied for the country that was analyzed, for the period considered and for
the methodology adopted, making comparison rather difficult.