Economic Models - Convex Optimization

Inflation Control in Central and Eastern European Countries 181
not find adequate data so the sample period was even shorter. Data are
monthly, but in order to reduce the volatility, we used quarterly averages,
adjusting the frequency properly. We took the CPI to compute inflation and
the real exchange rate, and the seasonally adjusted industrial production
to derive a measure of economic activity (when only the nonseasonally
adjusted series was available, we run a preliminary step using the X-12
filter in EViews to remove seasonality); for the nominal interest rate we
used a three-months inter-bank rate or the Treasury bills rate of the same
maturity. More details on the data used are at the end of this paper. We
always considered Germany as the international reference, even if in the
first part of the sample period some countries pegged the exchange rate to
the US$: the EU in fact, constitutes by far the biggest trade partner for the
CEECs.
There is a strong seasonal component in the quarterly inflation, which
is likely to shift the weights towards the fourth lag in the PC equation;
the choice of the year appreciation of the real exchange rate was then also
convenient to remove the seasonal effect.
As a measure of the economic activity we took the output gap, defined
the difference between the observed and the potential output computed
using the Hodrik Prescott (HP) filter on the quarterly average of the production
index. Even if the HP gap is usually considered an inexact measure
of the economic cycle, due to its purely numerical definition, we still think
that it is at least informative of the effective output gap. Plots of the inflation
in the four countries are in Fig. 1 (figures are all collected at the end of
Figure 1.
Yearly inflation, Germany, Poland, Czech Republic, and Slovenia.