Hostname: page-component-586b7cd67f-2brh9 Total loading time: 0 Render date: 2024-11-22T20:40:55.675Z Has data issue: false hasContentIssue false
  • English
  • Français

SWITCHING TO GOOD POLICY? THE CASE OF CENTRAL AND EASTERN EUROPEAN INFLATION TARGETERS

Published online by Cambridge University Press:  10 April 2019

Andrej Drygalla
Andrej Drygalla*
Affiliation:
Halle Institute for Economic Research (IWH)
*
Address correspondence to: Andrej Drygalla, Halle Institute for Economic Research (IWH), Kleine Maerkerstrasse 8, 06108 Halle (Saale), Germany. e-mail: [email protected]. Phone: +49 345 7753 812.
Get access Rights & Permissions [Opens in a new window]

Abstract

The paper analyzes how actual monetary policy changed following the official adoption of inflation targeting in the Czech Republic, Hungary, and Poland and how it affected the volatilities of important macroeconomic variables in the years thereafter. To disentangle the effects of the policy shift from exogenous changes in the volatilities of these variables, a Markov-switching dynamic stochastic general equilibrium model is estimated that allows for regime switches in the policy parameters and the volatilities of shocks hitting the economies. Whereas estimation results reveal periods of high and low volatility for all three economies, the presence of different policy regimes is supported by the underlying data for the Czech Republic and Poland, only. In both economies, monetary policy switched from weak and unsystematic to strong and systematic responses to inflation dynamics. Simulation results suggest that the policy shifts of both central banks successfully reduced inflation volatility in the following years. The observed reduction in output volatility, on the other hand, is attributed more to a reduction in the size of external shocks.

Keywords

Markov-Switching DSGE ModelsInflation TargetingSmall Open Economy
Type
Articles
Information
Macroeconomic Dynamics , Volume 24 , Issue 8 , December 2020 , pp. 2104 - 2128
Copyright
© 2019 Cambridge University Press

Access options

Get access to the full version of this content by using one of the access options below. (Log in options will check for institutional or personal access. Content may require purchase if you do not have access.)

Footnotes

The author would like to thank Boris Blagov, Makram El-Shagi, Oliver Holtemöller, Tomáš Holub, Axel Lindner, Galina Potjagailo, Mathias Trabandt, two anonymous referees, and the participants at conferences in Leipzig and Prague, the INFER Workshop in Timisoara and seminars at the Halle Institute for Economic Research for their helpful comments.

References

Alstadheim, R., Bjørnland, H. C. and Maih, J. (2013) Do Central Banks Respond to Exchange Rate Movements? A Markov-switching Structural Investigation. Norges Bank, Working Paper 2013/24.Google Scholar
Bianchi, F. (2010) Regime Switches, Agents’ Beliefs, and Post-World War II U.S. Macroeconomic Dynamics. Department of Economics, Duke University, Working Papers 10–39.Google Scholar
Blagov, B. and M., Funke (2018) The Regime-dependent evolution of credibility: A fresh look at Hong Kong’s linked exchange rate system. Macroeconomic Dynamics, 1–35.Google Scholar
Boivin, J. and Giannoni, M. P. (2006) Has monetary policy become more effective? The Review of Economics and Statistics 88(3), 445–462.CrossRefGoogle Scholar
Calvo, G. A. (1983) Staggered prices in a utility-maximizing framework. Journal of Monetary Economics 12(3), 383–398.CrossRefGoogle Scholar
Chen, X. and MacDonald, R. (2012) Realized and optimal monetary policy rules in an estimated Markov-switching DSGE model of the United Kingdom. Journal of Money, Credit and Banking 44(6), 1091–1116.CrossRefGoogle Scholar
Davig, T. and Doh, T. (2008) Monetary Policy Regime Shifts and Inflation Persistence. Federal Reserve Bank of Kansas. Research Working Paper RWP 08–16.Google Scholar
Del Negro, M. and Schorfheide, F. (2009). Inflation dynamics in a small open economy model under inflation targeting: Some evidence from Chile. In: Schmidt-Hebbel, K., and Walsh, C. E. (eds.), Monetary Policy under Uncertainty and Learning, vol. 13. pp. 511–562, Santiago, Chile: Central Bank of Chile.Google Scholar
ECB (2008) Opinion of the European Central Bank of 2 December 2008 at the Request of the Hungarian Ministry of Finance on a Draft Law Amending the Law on the Magyar Nemzeti Bank. Opinion (CON/2008/83), European Central Bank.Google Scholar
ECB (2011) Opinion of the European Central Bank of 22 December 2011 on the Magyar Nemzeti Bank’s Independence. Opinion (CON/2011/106), European Central Bank.Google Scholar
Farmer, R. E. A., Waggoner, D. F. and Zha, T. (2011) Minimal state variable solutions to Markov-switching rational expectations models. Journal of Economic Dynamics and Control 35(12), 2150–2166.CrossRefGoogle Scholar
Fernández-Villaverde, J. and Rubio-Ramírez, J. F. (2007) How Structural Are Structural Parameters? National Bureau of Economic Research, NBER Working Papers 13166.CrossRefGoogle Scholar
Galí, J. and Monacelli, T. (2005) Monetary policy and exchange rate volatility in a small open economy. The Review of Economic Studies 72(3), 707–734.CrossRefGoogle Scholar
Hurtado, S. (2014) DSGE models and the Lucas critique. Economic Modelling 4(S1), S12–S19.CrossRefGoogle Scholar
Ilzetzki, E., Reinhart, C. M. and Rogoff, K. S. (2010) Exchange Rate Arrangements Entering the 21st Century: Which Anchor Will Hold? Technical Report, University of Maryland and Harvard University.Google Scholar
IMF (2015) Central and Eastern Europe: New Member States (NMS) Policy Forum 2014. IMF Country Report 15/98, International Monetary Fund.CrossRefGoogle Scholar
Justiniano, A. and Preston, B. (2010) Monetary policy and uncertainty in an empirical small open economy model. Journal of Applied Econometrics 25(1), 93–128.CrossRefGoogle Scholar
Kim, C.-J. and Nelson, C. R. (1999) State-Space Models with Regime Switching: Classical and Gibbs-Sampling Approaches with Applications, Cambridge, MA: The MIT Press.Google Scholar
Kriwoluzky, A., Müller, G. J. and Wolf, M. (2015) Exit Expectations and Debt Crises in Currency Unions. Halle Institute for Economic Research (IWH), IWH Discussion Papers 18/2015.Google Scholar
Lipinńska, A. (2015) Optimal monetary policy for the EMU accession countries. A new Keynesian approach. Macroeconomic Dynamics 19(7), 1427–1475.CrossRefGoogle Scholar
Liu, P. and Mumtaz, H. (2010) Evolving Macroeconomic Dynamics in a Small Open Economy: An Estimated Markov-switching DSGE Model for the United Kingdom. Bank of England, Bank of England Working Papers 397.CrossRefGoogle Scholar
Lubik, T. A. and Schorfheide, F. (2007) Do central banks respond to exchange rate movements? A structural investigation. Journal of Monetary Economics 54(4), 1069–1087.CrossRefGoogle Scholar
Maih, J. (2015) Efficient Perturbation Methods for Solving Regime-switching DSGE Models. Norges Bank, Working Paper 1/2015.CrossRefGoogle Scholar
Pfeifer, J. (2018) A Guide to Specifying Observation Equations for the Estimation of DSGE Models. Technical Report, University of Cologne.Google Scholar
Stock, J. H. and Watson, M. W.. (1999) Forecasting inflation. Journal of Monetary Economics 44(2), 293–335.CrossRefGoogle Scholar
Stock, J. H. and Watson, M. W. (2002) Has the Business Cycle Changed and Why? National Bureau of Economic Research, Inc., NBER Working Papers 9127.Google Scholar
Taylor, J. B. (1993) Discretion versus policy rules in practice. Carnegie-Rochester Conference Series on Public Policy 39(1), 195–214.CrossRefGoogle Scholar