A Markov Switch to Inflation Targeting in Emerging Market Peggers with a Focus on the Czech Republic, Poland and Hungary

Marjan Petreski ()

Focus on European Economic Integration, 2011, issue 3, 57-75

Abstract: The objective of this paper is to empirically examine if monetary policy conduct has significantly changed in nine emerging economies, including the Czech Republic, Poland and Hungary, after the switch from exchange rate targeting to inflation targeting. An augmented Taylor rule is estimated with a Markov switching method for each of the nine countries on the basis of monthly data over the period from the early 1990s to end-2009. In general, the results suggest that inflation targeting represented a real switch in eight emerging economies. We identified the following differences for the period of inflation targeting compared to the preceding period of exchange rate targeting: (1) The economic environment became more stable; (2) the central bank’s reaction to inflation deviations from the target moderated (as it was probably possible to share the burden of inflationary pressures between interest rate increases and currency depreciations); (3) the central bank’s response to the output gap also moderated although it was statistically significant in only half of the countries; this is an indication of strict inflation targeting whereby meeting the inflation target is the primary objective. For the Czech Republic and Poland, an intermediate regime is identified, which is associated with the economic developments in these two countries prior to establishing a full-fledged inflation targeting regime. For Hungary, we identified only one regime, which is likely to reflect the combined strategy of targeting both the exchange rate and inflation that the country followed nearly over the entire period under review.

Keywords: monetary regime switch; inflation targeting; CESEE-3; Markov switching (search for similar items in EconPapers)
JEL-codes: E42 E52 E58 (search for similar items in EconPapers)
Date: 2011
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Citations: View citations in EconPapers (3)

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