Economic Models - Convex Optimization

190 Fabrizio Iacone and Renzo Orsi
the most relevant differences were in the fact that the coefficient of the real
rate, that signals the transmission of the monetary policy impulse from the
monetary authority to the economy, and the real exchange rate depreciation,
were only significant and with the correct sign in the second part of the
sample (the economic activity in Germany remained insignificant).
It is possible that instability affected the PC equation too, albeit in
this case the evidence was less compelling. Using the whole sample that
started in 1994, the CUSUMsq statistic did not indicate the presence of any
break, but according to the Chow test a discontinuity took place in 1998.
The estimated coefficient of the economic activity was largely insignificant,
despite having the same sign predicted by the economic theory, while we
found that the real exchange rate appreciation had a strongly significant
anti-inflationary effect. The estimated model was
⎧
ŷ ⎪⎨ t = 0.010 + 0.620y t−1
(0.006) (0.116)
⎪⎩ ̂π t =−0.76π t−1
(0.23)
− 0.03y t−1 − 0.083(q t−1 − q t−5 )
(0.001)
(0.050)
− 0.21π t−2
(0.25)
− 0.31π t−3 + 32.55(q t−1 − q t−5 )
(0.18)
(11.97)
over the period 1998Q1–2004Q1 for both the AD and the PC, while if we
relied on the CUSUMsq statistic rather than on the Chow one for the PC,
the PC equation estimated over the period 1994Q1–2004Q1 was
̂π t =−0.84π t−1
(0.15)
− 0.33π t−2
(0.17)
− 0.34π t−3 + 25.338(q t−1 − q t−5 )
(0.09)
(9.186)
Comparing these estimates, notice that if a break did indeed take place,
then the consequence was that the real exchange rate appreciation had a
stronger effect against inflation in the last part of the sample, that was
exactly when Czech central bank used inflation rather than exchange rate
targeting. As in the case of Poland, we then found no evidence that the
switch of monetary policy target resulted in a worsening of the inflationary
dynamics. On the contrary, if a change in the dynamics of the growth rate
of prices took place at all, when inflation targeting was introduced, it was
in favor of an easier control of it.
3.4. Slovenia
As we did for Czech Republic, in the case of Slovenia too we only considered
the part of the sample corresponding to the existence of an independent
state.