Hostname: page-component-78c5997874-t5tsf Total loading time: 0 Render date: 2024-11-20T05:17:03.448Z Has data issue: false hasContentIssue false
  • English
  • Français

TREND INFLATION AND MONETARY POLICY IN EASTERN EUROPE

Published online by Cambridge University Press:  20 July 2017

Monika Junicke
Monika Junicke*
Affiliation:
City University London and University of Cagliari
*
Address correspondence to: Monika Junicke, Department of Economics and Business, University of Cagliari, Viale Sant'Ignazio 17, 09123 Cagliari, Italy; e-mail: [email protected].
Get access Rights & Permissions [Opens in a new window]

Abstract

I use a two-country dynamic stochastic general equilibrium (DSGE) model with a nonzero steady-state inflation to study monetary policy in transition economies. In particular, my analysis focuses on whether inflation targeting is based on a consumer price index (CPI) or its producer counterpart, producer price index (PPI). This issue is specifically relevant for transition economies as they might be subject to Balassa–Samuelson effects arising from trading in international markets. Under these circumstances, domestic inflation is possibly higher than imported inflation, hence targeting PPI inflation may prove more effective in influencing domestic macroeconomic variables than targeting CPI inflation. Using a Bayesian methodology, I find that the central banks of three Eastern European countries (namely, the Czech Republic, Hungary, and Poland) are likely to target PPI inflation rather than CPI inflation. This result is in line with the theoretical predictions in the literature, and is robust across several Taylor-type rules.

Keywords

Trend InflationMonetary PolicyTransition EconomyBayesian DSGE Estimation
Type
Articles
Information
Macroeconomic Dynamics , Volume 23 , Issue 4 , June 2019 , pp. 1649 - 1663
Copyright
Copyright © Cambridge University Press 2017 

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

I would like to thank Michael Ben-Gad for his guidance, Vincenzo Merella for discussions over several versions of the paper, and Nicola Acocella, Yunus Aksoy, Henrique Basso, Beatriz de Blas, Miguel Leon-Ledesma, Giovanni Melina, Alessio Moro, Haroon Mumtaz, Galo Nuño Barrau, and an anonymous associate editor and referee, as well as participants at the 18th International Conference on Macroeconomic Analysis and International Finance and at the 57th Annual Conference of the Italian Economic Association for the helpful comments.

References

REFERENCES

Ascari, Guido and Ropele, Tiziano (2007) Optimal monetary policy under low trend inflation. Journal of Monetary Economics 54, 2568–2583.Google Scholar
Ascari, Guido and Sbordone, Argia M. (2014) The macroeconomics of trend inflation. Journal of Economic Literature 52, 679–739.Google Scholar
Baxa, Jaromír, Horváth, Roman, and Vašíček, Bořek (2014) How does monetary policy change? Evidence on inflation-targeting countries. Macroeconomic Dynamics 18, 593–630.Google Scholar
Caraiani, Petre (2013) Comparing monetary policy rules in CEE economies: A Bayesian approach. Economic Modelling 32, 233–246.Google Scholar
Catão, Luis A. V. and Chang, Roberto (2015) World food prices and monetary policy. Journal of Monetary Economics 75, 69–88.Google Scholar
Corsetti, Giancarlo, Dedola, Luca, and Leduc, Sylvain (2010) Optimal monetary policy in open economies. In Friedman, Benjamin M. and Woodford, Michael (eds.), Handbook of Monetary Economics, vol. 3, pp. 861–933. Amsterdam: North Holland, Elsevier.Google Scholar
Corsetti, Giancarlo and Pesenti, Paolo (2001) Welfare and macroeconomic interdependence. Quarterly Journal of Economics 116, 421–445.Google Scholar
De Paoli, Bianca (2009) Monetary policy and welfare in a small open economy. Journal of International Economics 77, 11–22.Google Scholar
Drygalla, Andrej (2015) Switching to Exchange Rate Flexibility? The Case of Central and Eastern European Inflation Targeters. FIW working paper 139.Google Scholar
Égert, Balázs, Drine, Imed, and Lommatzsch, Kirsten (2003) The Balassa–Samuelson effect in central and eastern Europe: Myth or reality? Journal of Comparative Economics 31, 552–572.Google Scholar
Faia, Ester and Monacelli, Tommaso (2008) Optimal monetary policy in a small open economy with home bias. Journal of Money, Credit and Banking 40, 721–750.Google Scholar
Fernández-Villaverde, Jesús, Rubio-Ramírez, Juan Francisco, and Schorfheide, Frank (2016) Solution and estimation methods for DSGE models. In Taylor, John B. and Uhlig, Harald (eds.), Handbook of Macroeconomics, vol. 2, pp. 527–724. Amsterdam: North Holland, Elsevier.Google Scholar
Ferrero, Andrea, Gertler, Mark, and Svensson, Lars E. O. (2008) Current Account Dynamics and Monetary Policy. NBER working paper w13906.Google Scholar
Galì, Jordi and Gertler, Mark (1999) Inflation dynamics: A structural econometric analysis. Journal of Monetary Economics 44, 195–222.Google Scholar
Galì, Jordi, Gertler, Mark, and Lopez-Salido, J. David (2001) European inflation dynamics. European Economic Review 45, 1237–1270.Google Scholar
Galì, Jordi and Monacelli, Tommaso (2005) Monetary policy and exchange rate volatility in a small open economy. Review of Economic Studies 72, 707–734.Google Scholar
Gerlach, Stefan and Lewis, John (2014) Zero lower bound, ECB interest rate policy and the financial crisis. Empirical Economics 46, 865–886.Google Scholar
Jakab, Zoltán M. and Világi, Balázs (2008) An Estimated DSGE Model of the Hungarian Economy. MNB working paper 2008/9.Google Scholar
Justiniano, Alejandro and Preston, Bruce (2010) Monetary policy and uncertainty in an empirical small open-economy model. Journal of Applied Econometrics 25, 93–128.Google Scholar
Kolasa, Marcin (2009) Structural heterogeneity or asymmetric shocks? Poland and the euro area through the lens of a two-country DSGE model. Economic Modelling 26, 1245–1269.Google Scholar
Lubik, Thomas A. and Schorfheide, Frank (2005) A Bayesian look at new open economy macroeconomics. NBER Macroeconomics Annual 20, 313–366.Google Scholar
Lubik, Thomas A. and Schorfheide, Frank (2007) Do central banks respond to exchange rate movements? A structural investigation. Journal of Monetary Economics 54, 1069–1087.Google Scholar
Monacelli, Tommaso (2005) Monetary policy in a low pass-through environment. Journal of Money, Credit and Banking 37, 1047–1066.Google Scholar
Rabanal, Pau and Tuesta, Vicente (2010) Euro-dollar real exchange rate dynamics in an estimated two-country model: An assessment. Journal of Economic Dynamics and Control 34, 780–797.Google Scholar
Ricci, Luca Antonio, Milesi-Ferretti, Gian Maria, and Lee, Jaewoo (2013) Real exchange rates and fundamentals: A cross-country perspective. Journal of Money, Credit and Banking 45, 845–865.Google Scholar
Sbordone, Argia M. (2002) Prices and unit labor costs: A new test of price stickiness. Journal of Monetary Economics 49, 265–292.Google Scholar
Schorfheide, Frank (2008) DSGE model-based estimation of the New Keynesian Phillips curve. Economic Quarterly 94, 397–433.Google Scholar
Smets, Frank and Wouters, Raf (2003) An estimated dynamic stochastic general equilibrium model of the euro area. Journal of the European Economic Association 1, 1123–1175.Google Scholar
Steinsson, Jon (2003) Optimal monetary policy in an economy with inflation persistence. Journal of Monetary Economics 50, 1425–1456.Google Scholar
Tonner, Jaromir, Polansky, Jiri, and Vašíček, Osvald (2011) Parameter drifting in a DSGE model estimated on Czech data. Czech Journal of Economics and Finance 61, 510–524.Google Scholar