Monetary Policy of the National Bank of Slovakia

Abstract

Following Surico (2007a, b), we analyse the monetary policy of the National Bank of Slovakia (NBS). We can verify by mentioned approach potential asymmetries in preferences of the monetary authority as well as potential nonlinearity in the economic structure. If a monetary policymaker has asymmetric preferences for the output stability, he cannot commit his policy. Such policymaker has the known time-consistency problem and systematically produces an inflation bias. Our conclusions can be interpreted in the frame of the discussion about prospects of the future membership of Slovak economy in European Monetary Union (EMU).

By our analysis Slovak monetary authority responses more strictly when the level of the nominal interest rate is higher than target. Even if the average target policy rate of NBS was about five percent, the average interest rate in Slovakia was about ten percent. The difference of about five percent was caused by mentioned tendency of NBS. Preferences of NBS for both output and inflation stabilisation were symmetric. Slovak monetary policy therefore does not produce an inflation bias.

Keywords: time consistency of the monetary policy, National Bank of Slovakia. asymmetric preferences. European Monetary Union. GMM

JEL Classification: C12, C13, E52, E58