Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/55847 
Year of Publication: 
2012
Series/Report no.: 
Working Paper No. 104
Publisher: 
Universität Leipzig, Wirtschaftswissenschaftliche Fakultät, Leipzig
Abstract: 
Monetary policy in CEE is an important determinant in the wage bargaining process, because trade unions have to predict inflation as one component of future real wages. This paper scrutinizes whether countries in CEE that officially announce an inflation target are tempted to act time-inconsistently and switch from the announced inflation target to an exchange rate target in order to sustain higher output via surprise inflation. If market participants discover the time-inconsistency, they will adjust their inflation expectations, which result in higher average rates of price increases. The time-inconsistent behavior in central bank interest rate setting is modeled by several Taylor rules. An empirical application provides evidence that some monetary authorities in CEE such as the Czech Republic and Slovakia have acted timeinconsistent and have focused on the exchange rate in periods of official inflation targeting, which might have contributed to higher average rates of inflation and welfare losses. Furthermore, uncertainty in wage determination process has risen due to a harder predictability of productivity and inflation as components of future nominal wages.
Subjects: 
monetary policy
Taylor rules
exchange rate regime
Central and Eastern Europe
inflation targeting
JEL: 
E52
E58
F31
O52
P20
Document Type: 
Working Paper

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