Monetary Policy Transmission, Interest Rate Rules and Inflation Targeting in Three Transition Countries

U of Bologna Working Paper No. 429

39 Pages Posted: 8 Feb 2002

See all articles by Roberto Golinelli

Roberto Golinelli

University of Bologna - Department of Economics

Riccardo Rovelli

University of Bologna - Department of Economics; IZA Institute of Labor Economics

Date Written: December 2001

Abstract

In 1991, the rate of inflation in the Czech Republic, Hungary and Poland was between 35% and 70%. At the end of 2001, it is below 8%. We setup a small structural macro model of these economies to explain the process of disinflation. Contrary to a widespread skepticism, which permeated a large part of previous research on these issues, we show that a simple open macroeconomic model, along the lines of Svensson (2000, Journal of International Economics), with forward-looking inflation and exchange rate expectations, can adequately characterize the relationship between the output gap, inflation, the real interest rate and the exchange rate during the course of transition.

We use the estimated models to interpret the main features of monetary policy in each country and identify the channels of policy transmission. We characterize the policy rules and assess the relative importance of the interest rate channel (on aggregate demand) and the exchange rate channel (which affects both aggregate demand and supply) in determining the path of (dis)inflation. In the same context, we also tentatively analyze the consequences of attempting a faster path of disinflation. Finally, we evaluate the appropriateness of the inflation targeting framework which has been adopted recently in all three countries, and discuss to what extent it represents a discontinuity with the past.

Keywords: Disinflation policy, Interest rate rules, Inflation targeting, Transition economies, Small open-economy macro models

JEL Classification: E31, E52, F41, P24

Suggested Citation

Golinelli, Roberto and Rovelli, Riccardo, Monetary Policy Transmission, Interest Rate Rules and Inflation Targeting in Three Transition Countries (December 2001). U of Bologna Working Paper No. 429, Available at SSRN: https://ssrn.com/abstract=299409 or http://dx.doi.org/10.2139/ssrn.299409

Roberto Golinelli

University of Bologna - Department of Economics ( email )

Strada Maggiore 45
Bologna, 40125
Italy
+39 051 209 2638 (Phone)
+39 051 209 2664 (Fax)

Riccardo Rovelli (Contact Author)

University of Bologna - Department of Economics ( email )

Strada Maggiore 45
Bologna, 40125
Italy
+39 051 2092 601 (Phone)
+39 051 6402 664 (Fax)

IZA Institute of Labor Economics ( email )

P.O. Box 7240
Bonn, D-53072
Germany

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