Real convergence in Central and Eastern European EU Member States: which role for exchange rate volatility?

This paper analyzes the relation between exchange rate volatility and several macroeconomic variables, namely real per capita output growth, the credit cycle, the stock of inward foreign direct investment (FDI) and the current account balance, in the Central and Eastern European EU Member States. Using panel estimations for the period between 1995 and 2006, we find that lower exchange rate volatility is associated with higher growth (for relatively less financially developed economies), higher stocks of FDI (for relatively more open economies), higher current account deficits, and a more volatile development of the credit to GDP ratio. JEL Classification: F3, F4, F5Catching-up, Convergence, credit, current account, EU, Exchange rate volatility, FDI, Growth

The Impact of Monetary Policy and Exchange Rate Shocks in Poland: Evidence from a Time-Varying VAR

This paper follows the Bayesian time-varying VAR approach with stochastic volatility developed by Primiceri (2005), to analyse whether the reaction of output and prices to interest rate and exchange rate shocks has changed across time (1996-2012) in the Polish economy. The empirical findings show that: (1) output appears more responsive to an interest rate shock at the beginning of our sample. Since 2000, absorbing this shock has become less costly in terms of output, notwithstanding some reversal since the beginning of the global financial crisis. The exchange rate shock also has a time-varying effect on output. From 1996 to 2000, output seems to decline, whereas for periods between 2000 and 2008 it has a positive significant effect. (2) Consumer prices appear more responsive to an interest rate shock during the first half of our sample, when Poland experienced high inflation. The impact of an exchange rate shock on prices seems to slightly decrease across time

Inflation forecasting in the new EU Member States

To the best of our knowledge, our paper is the first systematic study of the predictive power of monetary aggregates for future inflation for the cross section of New EU Member States. This paper provides stylized facts on monetary versus non-monetary (economic and fiscal) determinants of inflation in these countries as well as formal econometric evidence on the forecast performance of a large set of monetary and nonmonetary indicators. The forecast evaluation results suggest that, as has been found for other countries before, it is difficult to find models that significantly outperform a simple benchmark, especially at short forecast horizons. Nevertheless, monetary indicators are found to contain useful information for predicting inflation at longer (3-year) horizons. JEL Classification: C53, E31, E37, E51, E52, E62, P24Fiscal Policy, Inflation forecasting, information content of money, leading indicators, monetary policy, new EU member states

Inflation dynamics and dual inflation in accession countries: a 'New Keynesian' perspective

This paper examines inflation dynamics in the current EU-accession countries in central and eastern Europe, focusing particularly on the determinants of 'dual inflation', that is, diverging inflation rates for tradable and non-tradable goods. The paper draws on the recently published data for the Harmonized Index of Consumer Prices (HICP) of the Accession countries and, indeed, finds evidence of ' dual inflation' in these economies. To test empirically for underlying determinants, the paper borrows from the recently developed New Phillips curve literature. Overall, domestic factors have systematically a stronger impact upon non-tradable goods inflation whereas international factors have a stronger impact over tradable goods. Furthermore, the results point to the possibly very different effects of exchange rate regimes over tradable and non-tradable goods inflation. On the whole, the findings suggest that the Balassa-Samuelson effect is not a prominent factor behind the current 'experience' of dual inflation in these countries. JEL Classification: E31, E58, F41, P24

The Impact of Monetary Policy and Exchange Rate Shocks in Poland: Evidence from a Time-Varying VAR

This paper follows the Bayesian time-varying VAR approach with stochastic volatility developed by Primiceri (2005), to analyse whether the reaction of output and prices to interest rate and exchange rate shocks has changed across time (1996-2012) in the Polish economy. The empirical findings show that: (1) output appears more responsive to an interest rate shock at the beginning of our sample. Since 2000, absorbing this shock has become less costly in terms of output, notwithstanding some reversal since the beginning of the global financial crisis. The exchange rate shock also has a time-varying effect on output. From 1996 to 2000, output seems to decline, whereas for periods between 2000 and 2008 it has a positive significant effect. (2) Consumer prices appear more responsive to an interest rate shock during the first half of our sample, when Poland experienced high inflation. The impact of an exchange rate shock on prices seems to slightly decrease across time

Monetary policy, credibility and central bank constitutions

Although most macroeconomists agree that the control of inflation may involve losses of output, there is no consensus about why. New Classical economists, focusing on the issue of credibility, have identified incentive problems as important obstacles to price stability. On the contrary, many new Keynesians regard credibility problems as secondary. They focus on the microeconomic details of wage and price adjustments as potential sources of disinflationary costs. Yet, if the costs and the benefits of anti-inflationary policy are strictly related to the market structure of the economy, so will be the incentives tempting the monetary authority to inflate. Indeed, what we show in this thesis is that the microeconomic aspects of wage and price setting not only affect the costs (benefits) of credible disinflationary (inflationary) policy, but that they need to be considered to determine whether those disinflationary (inflationary) policies can be perceived as credible or not. Despite the relevance of this problem, the economic analysis of microfoundations has received little attention at the time of designing efficient resolutions for the credibility problem of monetary policy. This idea has been illustrated in different ways. First, Rogoff's idea of delegation does not seem very attractive, if the wage setting process appears to be dominated by insider workers. Moreover, we have underlined the difficulties that a country like Spain, with a highly distorted labour market, may face in fighting inflation. Second, interesting patterns of inflation and output behaviour may be generated by the interaction of both credibility problems and staggered wage setting. Finally, although the difficulties of implementing anti-inflationary policies are emphasised in all our examples, they are particularly severe when near-rational behaviour or, alternatively, costs of changing prices are taken into account

Real convergence in Central and Eastern European EU Member States: which role for exchange rate volatility?

This paper analyzes the relation between exchange rate volatility and several macroeconomic variables, namely real per capita output growth, the credit cycle, the stock of inward foreign direct investment (FDI) and the current account balance, in the Central and Eastern European EU Member States. Using panel estimations for the period between 1995 and 2006, we find that lower exchange rate volatility is associated with higher growth (for relatively less financially developed economies), higher stocks of FDI (for relatively more open economies), higher current account deficits, and a more volatile development of the credit to GDP ratio

Inflation forecasting in the new EU Member States

To the best of our knowledge, our paper is the first systematic study of the predictive power of monetary aggregates for future inflation for the cross section of New EU Member States. This paper provides stylized facts on monetary versus non-monetary (economic and fiscal) determinants of inflation in these countries as well as formal econometric evidence on the forecast performance of a large set of monetary and nonmonetary indicators. The forecast evaluation results suggest that, as has been found for other countries before, it is difficult to find models that significantly outperform a simple benchmark, especially at short forecast horizons. Nevertheless, monetary indicators are found to contain useful information for predicting inflation at longer (3-year) horizons

Inflation dynamics and dual inflation in accession countries: a 'New Keynesian' perspective

This paper examines inflation dynamics in the current EU-accession countries in central and eastern Europe, focusing particularly on the determinants of 'dual inflation', that is, diverging inflation rates for tradable and non-tradable goods. The paper draws on the recently published data for the Harmonized Index of Consumer Prices (HICP) of the Accession countries and, indeed, finds evidence of ' dual inflation' in these economies. To test empirically for underlying determinants, the paper borrows from the recently developed New Phillips curve literature. Overall, domestic factors have systematically a stronger impact upon non-tradable goods inflation whereas international factors have a stronger impact over tradable goods. Furthermore, the results point to the possibly very different effects of exchange rate regimes over tradable and non-tradable goods inflation. On the whole, the findings suggest that the Balassa-Samuelson effect is not a prominent factor behind the current 'experience' of dual inflation in these countries

The acceding countries’ strategies towards ERM II and the adoption of the euro - an analytical review

This paper reviews the strategies announced by the ten countries joining the European Union in May 2004 with regard to their intentions for participation in ERM II and the adoption of the euro. The paper examines the economic rationale of the monetary integration strategies declared by most acceding countries with a view to identifying also their potential risks. It does so by making use of several different approaches, including a short review of nominal convergence and a more extensive discussion from an optimum currency area perspective. An important part of the analysis is devoted to the implications of real convergence – i.e. catching-up growth in income and adjustment of the real economic structures towards those prevailing in the euro area – on the patterns of economic dynamics in acceding countries. Other aspects covered are the risks for external competitiveness in the convergence process and the appropriate pace of fiscal consolidation.