Economic Models - Convex Optimization
Economic Models - Convex Optimization Economic Models - Convex Optimization
Inflation Control in Central and Eastern European Countries 191 The data available for the estimation started from 1994Q1 for the AD equation and in 1993Q2 for the PC. We found anyway, evidence of model mis-specification when the first year is included, resulting in residual autocorrelation and inconsistent estimates: it is also fair to suspect, on the basis of the CUSUMsq statistic, that a break took place in the first part of the sample. We then removed 1993 from the dataset, and estimated the model from 1994 onwards (sample period 1994Q1–2003Q3 for theAD, 1994Q1– 2003Q4 for the PC), obtaining ⎧ ŷ ⎪⎨ t = 0.0226 + 0.343w t−1 (0.167) (0.234) ⎪⎩ ̂π t =−0.60π t−1 (0.14) − 0.66π t−2 (0.12) − 0.45π t−3 + 52.64(q t−1 − q t−5 ) (0.12) (15.60) The diagnostic tests confirmed that both the equations were correctly specified and stable in the period considered, albeit, we acknowledge that the estimates in the AD equation are only significant using a 10% threshold. We are inclined to consider them anyway, suspecting that a more clear link will emerge in the future, with a longer sample and an even higher integration in the European economy. Notice, on the other hand, the absence of the real interest rate, whose estimated coefficient even failed to have the sign prescribed in the economic theory: this supported the argument of Capriolo and Lavraac that, until recently, the interference of the central bank on the financial markets made the interest rates not informative about the monetary stance. The estimated PC is qualitatively similar to the Polish and Czech one, with inflation only driven by the exchange rate dynamics but not by the output gap: indeed, ˆβ y even resulted as negative, so in the final specification we excluded y t−1 from the explanatory variables altogether. In order to see, if the more active exchange rate policy resulted in an easier inflation control and then in a larger β q , we also tested (with a Forecast test) for a break in 2001, but we did not reject the hypothesis of stability. 3.5. Some Concluding Remarks Poland, Czech Republic, and Slovenia are small economies that in a few years re-shaped their productive and distributive structures, opened to the international trade, established a functioning market economy and joined the EU. Despite these common features, they differ quite remarkably for the time and the condition, in which they started the transition to the market economy, for the policies they implemented since 1989, and for the size
192 Fabrizio Iacone and Renzo Orsi and the relative importance of the trade with the rest of the EU. It is then fair to expect that both the similarities and the differences emerge, and this is indeed the case. The most relevant common feature is the presence of a certain instability in the first part of the sample. To appreciate the importance of the transition, we observed that, according to a study of Coricelli and Jasbec (2004), the characteristics that may be associated to the initial conditions were the main driving forces of the real exchange rate dynamics. The variables that were more directly related to the economic notions of supply and demand, only acquired importance after a period of approximately five years. We found that the macroeconomic model structure begun to show a stable pattern only from 1994 onward, confirming the findings of Coricelli and Jasbec. Even taking 1994 as a starting value, anyway, some elements of instability remained, especially with respect to Czech Republic. The instability of the estimated macroeconomic relations is also informative about the speed of the transition. In this respect, we found that in Slovenia the adverse effect of theYugoslavian civil war canceled the advantage due to the self-management reform; Czech Republic, which had to face not only the decentralization and the break-up of CMEA but even the split of Czechoslovakia, fared worse. The relation between the variables got closer to the standard textbook description of a market supply and demand structure in the last few years. Yet, even in that part of the sample evidence of a transmission mechanism of monetary policy based on the interest rates was only present for Poland, and that too turned out to be very weak. Although it is not surprising that the exchange rate has a prominent role in inflation control in small open economies, our findings cannot be explained simply by this argument, because we explicitly include the exchange rate in both the equations of the model, then taking it into account (and holding it fixed in the interpretation of the results) in the multiple regression framework. One has rather to conclude that the interest rate channel of transmission of monetary policy was weak or obstructed, as indeed explicitly argued for Slovenia. This also means that, although these economies were acknowledged as functioning market economies, they may still be lagging behind; nonetheless, since a good development took place during the accession period, it is fair to expect that participation to the EU will foster integration. Meanwhile, their presence should not hamper inflation control too much, because the exchange rate is clearly a valid instrument for that purpose: this means that in a widened euro-zone, the Eurosystem may control inflation in the CEECs by controlling it in the core area.
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192 Fabrizio Iacone and Renzo Orsi<br />
and the relative importance of the trade with the rest of the EU. It is then<br />
fair to expect that both the similarities and the differences emerge, and this<br />
is indeed the case.<br />
The most relevant common feature is the presence of a certain instability<br />
in the first part of the sample. To appreciate the importance of the transition,<br />
we observed that, according to a study of Coricelli and Jasbec (2004), the<br />
characteristics that may be associated to the initial conditions were the main<br />
driving forces of the real exchange rate dynamics. The variables that were<br />
more directly related to the economic notions of supply and demand, only<br />
acquired importance after a period of approximately five years. We found<br />
that the macroeconomic model structure begun to show a stable pattern<br />
only from 1994 onward, confirming the findings of Coricelli and Jasbec.<br />
Even taking 1994 as a starting value, anyway, some elements of instability<br />
remained, especially with respect to Czech Republic.<br />
The instability of the estimated macroeconomic relations is also informative<br />
about the speed of the transition. In this respect, we found that in<br />
Slovenia the adverse effect of theYugoslavian civil war canceled the advantage<br />
due to the self-management reform; Czech Republic, which had to face<br />
not only the decentralization and the break-up of CMEA but even the split<br />
of Czechoslovakia, fared worse.<br />
The relation between the variables got closer to the standard textbook<br />
description of a market supply and demand structure in the last few years.<br />
Yet, even in that part of the sample evidence of a transmission mechanism<br />
of monetary policy based on the interest rates was only present for<br />
Poland, and that too turned out to be very weak. Although it is not surprising<br />
that the exchange rate has a prominent role in inflation control in small<br />
open economies, our findings cannot be explained simply by this argument,<br />
because we explicitly include the exchange rate in both the equations of<br />
the model, then taking it into account (and holding it fixed in the interpretation<br />
of the results) in the multiple regression framework. One has rather<br />
to conclude that the interest rate channel of transmission of monetary policy<br />
was weak or obstructed, as indeed explicitly argued for Slovenia. This<br />
also means that, although these economies were acknowledged as functioning<br />
market economies, they may still be lagging behind; nonetheless,<br />
since a good development took place during the accession period, it is fair<br />
to expect that participation to the EU will foster integration. Meanwhile,<br />
their presence should not hamper inflation control too much, because the<br />
exchange rate is clearly a valid instrument for that purpose: this means that<br />
in a widened euro-zone, the Eurosystem may control inflation in the CEECs<br />
by controlling it in the core area.
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