Economic Models - Convex Optimization

Inflation Control in Central and Eastern European Countries 193
Although they are all small open economies, a pattern can be envisaged
in terms of dimension and openness to international trade, and this
is reflected in the estimated models: Poland, is the only country in which
the international factors did not affect the AD. Another way to appreciate
the importance of the international openness is to look at the estimated
effect of a 1% appreciation of the exchange rate: the impact on the inflation
dynamics is clearly ranked according to the relative dimension of trade.
Stability analysis is also important because it allows us to understand if
the switch in Poland and in Czech Republic from exchange rate to inflation
targeting affected the price setting formation. We did not find any evidence
of it, nor we found that a more aggressive exchange rate policy in Slovenia
eased the costs of disinflation from 2001 onwards. The instability that we
found for Czech Republic seems to suggest an evolution of the macroeconomic
structure towards a market economy, and should then have more to
do with EU accession than with inflation targeting. One main implication
that we perceive is that the exchange rate commitment is either irrelevant
or, more likely, replaceable with inflation targeting as a nominal anchor.
We think that this conclusion is of particular interest to help choosing the
monetary target for the period preceding the last two years before fixing
the exchange rate in the ERM2: inflation targeting should be preferred and
ERM2 membership should only be limited to the two mandatory years.
We also think that this lesson can be extended to other emerging market
economies, and that inflation targeting, rather than explicit exchange rate
commitment, should be preferred, especially if strict capital controls are
not in place.
References
Amato, JD and S Gerlach (2002). Inflation targeting in emerging market and transition
economies: lessons after a decade. European Economic Review 46, 781–790.
Capriolo, G and V Lavrac (2003). Monetary and exchange rate policy in Slovenia. Eastward
Enlargement of the Euro-Zone Working Papers, 17G. Berlin: Free University Berlin,
Jean Monnet Centre of Excellence, 1–35.
Coricelli, F and B Jasbec (2004). Real exchange rate dynamics in transition economies.
Structural Change and Economic Dynamics 15, 83–100.
Dvorsky, S (2000). Measuring central bank independence in selected transition countries
and the disinflation process. Bank of Finland, Bofit Discussion Paper 13. Helsinki:
Bank of Finland, 1–14.
Iacone, F and R Orsi (2004). Exchange rate regimes and monetary policy strategies for
accession countries. In Fiscal, Monetary and Exchange Rate Issues of the Eurozone
Enlargement, K Zukrowska, R Orsi and V Lavrac (eds.), pp. 89–136. Warsaw: Warsaw
School of Economics.
Maliszewski, WS (2000). Central bank independence in transition economies. Economics
of Transition 8, 749–789.