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This paper uses data on currency options prices for the exchange rates of the three largest new EU member states Poland, Czech Republic and Hungary vis-à-vis the euro and the US dollar to estimate the risk-neutral density (RND) functions and the density interval bands. Analysing the RNDs, we find that only some of the implied moments on the Polish zloty exchange rate systematically move around policy events, while the implied moments on the RNDs on the Czech koruna and Hungarian forint show more systematic changes. Regarding the HUF/EUR currency pair, monetary policy news have a significant impact on all moments, while changes in implied standard deviation signal a higher probability of interest rate changes by the Hungarian central bank. The more marked results for HUF/EUR exchange rate could reflect the fixed exchange rate regime prevailing throughout the sample period.

This paper considers how the "true" common monetary policy that is conducted by the ECB under various sources of uncertainty will differ from the policy that was agreed in the Maastricht Treaty, and how the uncertainties may induce a representative government to criticise the common monetary policy.Acquiring information about the transmission mechanism, and revealing that information as well as information about the ECB reaction function, is incentive compatible for the ECB both directly and indirectly.The direct effect means that the ECB's own welfare is decreasing in uncertainties.The indirect effect arises because less uncertainty reduces the risk of criticism from the individual governments' side.The risk of criticism is the larger, and consequently the indirect incentive to reduce uncertainty is the higher, the larger are the leftward shifts in national political preferences from those that prevailed when the Maastricht Treaty was signed.The model also provides an explanation for the ECB's choice of monetary policy strategy that incorporates elements of both monetary targeting and inflation targeting.

We study monetary policy delegation in a framework where fiscal policy is determined endogenously and wages are negotiated by trade unions who face a trade-off between real wages and employment.If the median trade union voter is a senior member the nominal wages are too high to guarantee full insider. employment.The fiscal authority can subject the central bank to institutional arrangements.The optimal choice of central bank preferences shows a central banker who is more inflation averse, but not infinitely so, than the fiscal authority.This happens because employment and government expenditures are not invariant to changes in the monetary regime.If the fiscal authority gives the central bank to an inflation target, the optimal target is contingent upon both the fiscal authority's and the trade union's preferences.Moreover, the fiscal authority's gain from inflation targeting is highest if the median union voter has no employment objective.When the union cares about employment, both fiscal and monetary policies become subject to time-inconsistency problems.In equilibrium, the overall welfare under inflation targeting can be lower than under discretion.However, when the union's employment objective becomes sufficiently important, the gain starts to increase.Thus, we find a U-shaped relationship between the gain from inflation targeting and the trade union's weight on employment.

This study contains four essays in the areas of fiscal-monetary policy coordination, public finance and optimal monetary institutions. Essay 1 analyses inflation targeting in an economy with decentralised monetary and fiscal policies and centralised wage setting.Depending on the specification of the trade unions' utility functions, both fiscal and monetary policy can be subject to time-inconsistency problems.Inflation targeting can achieve society's optimal outcome in this model only when the trade unions do not have an employment target which is lower than full employment.The result is robust to uncertainty about the monetary authority's preferences. Essay 2 studies inflation targeting in the context of a monetary union.The setup resembles the Maastricht treaty where a politically representative council delegates monetary policy to an independent central bank.The optimal delegation decision is shown to include an inflation target and a central banker with conservative preferences.It is shown that fiscal discipline in the union increases under such optimal delegation.Moreover, if the voting rules for the delegating council are designed optimally, the council's incentives to renegotiate ex post the central bank's target can be eliminated. Essay 3 focuses on Central Bank (CB) institutions and fiscalmonetary policy coordination under debt stabilisation programmes.When the government and the CB cooperate, a less inflation-averse CB induces faster debt reduction.Under non-cooperative strategies, the opposite result holds.In the presence of political instability, the government shifts fiscal adjustment to the future.Additional adjustment time does not alleviate the situation, but electoral incentives can induce earlier adjustment. Essay 4 looks at optimal fiscal policy in the presence of foreseeable shocks.When the government cares about the future, the deficit is optimally set lower before the arrival of the shock and more adjustment effort is shifted from ex post to ex ante.In EMU, fiscal policy will be constrained by the Stability and Growth Pact, which penalises excessive deficits.Thus, in the presence of shocks, fiscal policy before the shock can become highly restrictive under the pact.