This essay explores the challenges facing the policy mix in Central Europe (Hungary, Poland, Czech Republic) since 2000. At the turn of the century, their independent central banks implemented a monetary policy strategy of inflation targeting aiming for disinflation while the countries concomitantly started preparing their entry into the European Monetary Union (EMU), even before their accession to the EU in May 2004. This period was characterized by several episodes of conflicts between the central banks’ monetary policy and the governments’ fiscal policies, which brings to mind the conflict that opposed the national governments and the European central bank (ECB) in the first years of EMU. This latter conflict has been interpreted in terms of the difficulty for the new ECB to establish its credibility, leading it to implement a perhaps excessively restrictive monetary policy. Can the policy-mix conflicts in Central Europe in the 2000s be interpreted in the same framework? It seems that although the question of the central bank's credibility is relevant, the question of the government's fiscal policy credibility also arises, thus posing more generally the question of the credibility of macro-policies in the phase of preparation for EMU, in relation to their institutional framework.

We shall explore the credibility of monetary and fiscal policies in Central Europe, with a view to explaining the policy-mix conflicts observed and their resolution. The first two parts of the essay outline the institutional and economic framework of both macro policies. The third part exposes the conflicts observed. The fourth part explores whether they may be explained by a lack of central bank credibility and suggests that the problem also lies with fiscal policies. The fifth part argues that the conflicts may be interpreted in terms of imperfections of the institutional framework governing macro-policies and explains why the conflicts have been attenuated in recent years.

1. The Institutional and Economic Framework of Monetary Policy in Central Europe

The general framework of monetary policies includes the rules they are submitted to and their economic context.