Monetary policy under alternative exchange rate regimes in Central and Eastern Europe

Christina Ziegler

No 104, Working Papers from University of Leipzig, Faculty of Economics and Management Science

Abstract: Monetary policy in CEE is an important determinant in the wage bargaining process, because trade unions have to predict inflation as one component of future real wages. This paper scrutinizes whether countries in CEE that officially announce an inflation target are tempted to act time-inconsistently and switch from the announced inflation target to an exchange rate target in order to sustain higher output via surprise inflation. If market participants discover the time-inconsistency, they will adjust their inflation expectations, which result in higher average rates of price increases. The time-inconsistent behavior in central bank interest rate setting is modeled by several Taylor rules. An empirical application provides evidence that some monetary authorities in CEE such as the Czech Republic and Slovakia have acted timeinconsistent and have focused on the exchange rate in periods of official inflation targeting, which might have contributed to higher average rates of inflation and welfare losses. Furthermore, uncertainty in wage determination process has risen due to a harder predictability of productivity and inflation as components of future nominal wages.

Keywords: monetary policy; Taylor rules; exchange rate regime; Central and Eastern Europe; inflation targeting (search for similar items in EconPapers)
JEL-codes: E52 E58 F31 O52 P20 (search for similar items in EconPapers)
Date: 2012
New Economics Papers: this item is included in nep-cba, nep-eec, nep-ifn, nep-mac, nep-mon and nep-tra
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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Persistent link: https://EconPapers.repec.org/RePEc:zbw:leiwps:104

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