Targeting Relative Inflation Forecast as Monetary Policy Framework for Adopting the Euro

28 Pages Posted: 4 Apr 2005  

Lucjan T. Orlowski

Sacred Heart University - John F. Welch College of Business

Date Written: February 2005

Abstract

This study proposes relative inflation forecast targeting as an operational framework of monetary policy for adopting the euro by the EU new Member States. This strategy assumes containing differentials between the domestic and the eurozone inflation forecasts as an operational target. A model prescribing the RIFT framework is presented along with a set of appropriate policy indicator variables and instrument rules. The proposed framework advances the strategy based on relatively strict inflation targeting that is currently pursued by some NMS. Several ARCHclass tests in various functional forms are employed for providing preliminary empirical evidence on convergence of inflation differentials relative to the euro area for Poland, Czech Republic and Hungary.

Keywords: Inflation targeting, monetary convergence, euro adoption, EU new Member States

JEL Classification: E42, E52, E61, F36, P24

Suggested Citation

Orlowski, Lucjan T., Targeting Relative Inflation Forecast as Monetary Policy Framework for Adopting the Euro (February 2005). William Davidson Institute Working Paper No. 754. Available at SSRN: https://ssrn.com/abstract=682555 or http://dx.doi.org/10.2139/ssrn.682555

Lucjan T. Orlowski (Contact Author)

Sacred Heart University - John F. Welch College of Business ( email )

5151 Park Avenue
Fairfield, CT 06825
United States
203-371-7858 (Phone)

HOME PAGE: http://www.sacredheart.edu/ltorlowski.cfm

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