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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: mjunicke@gmail.com.
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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 

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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.

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