Monetary Policy Targeting in Central Europe's Transition Economics: The Case for Direct Inflation Targeting

CASE-CEU Working Paper Series No. 11

23 Pages Posted: 6 Mar 2006  

Lucjan T. Orlowski

Sacred Heart University - John F. Welch College of Business

Date Written: August 1998

Abstract

Monetary policies of Poland, Hungary and the Czech Republic have undergone a significant transformation in the 1990s. The initial currency peg and the exchange-rate-based monetary policy have been gradually replaced by more flexible exchange rates and money-based policies. Preparations for accession to the European Union and, later, to the European Monetary Union, call for further policy advancements including effective measures for lowering inflation, for reducing volatility of interest rates and market exchange rates, and for stabilizing domestic financial markets. Monetary authorities need to gain credibility for their policies, which should become more transparent, forward-looking and predictable. This paper argues that direct inflation targeting will be a desirable monetary policy approach for accomplishing these objectives. At the initial stage of monetary policy adjustments, a stricter form of inflation targeting is proposed in order to strengthen central banks policy discipline and commitment to disinflation. When price indexes reach a more sustainable level, flexible inflation targeting is advised. After the candidates join the EU and begin preparations for accession to the EMU, direct inflation targeting will have to be gradually phased-out and replaced by the euro-peg.

Keywords: transition economies, monetary policy, direct inflation targeting, monetary convergence, euro-peg

JEL Classification: E42, E52, E58, P24

Suggested Citation

Orlowski, Lucjan T., Monetary Policy Targeting in Central Europe's Transition Economics: The Case for Direct Inflation Targeting (August 1998). CASE-CEU Working Paper Series No. 11. Available at SSRN: https://ssrn.com/abstract=888415 or http://dx.doi.org/10.2139/ssrn.888415

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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