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There seems to be no consensus in the literature with respect to monetary policy strategies in combination with flexible exchange rate regimes. Therefore, this paper determines what the alternative strategies inflation targeting, Taylor rule, monetary conditions index, and managed floating have in common. The fact that all strategies build on reaction functions which use the short-term interest rate as an important or even the single monetary policy instrument allows a generalized reaction function for all strategies to be derived. Future research may use such a generalized reaction function for describing and determining monetary policy in emerging market economies with flexible exchange rate regimes.

AbstractWe document that a persistent inflation differential has opened across different groups of transition economies since 2001, with the CIS‐West seeing particularly high outcomes. We consider a range of non‐monetary explanations discussed in the literature (economic structure, policy and institutions), and controlling for economic shocks, we find a role for political stability, as emphasized in previous cross‐country work. However, our results suggest that lagging internal and external liberalization have been the key disincentives to disinflation. Consequently, lower inflation targets would not be credible in the absence of stronger structural and monetary policy frameworks.

Panel estimates based on 19 transition economies suggests that some central banks may aim at comparatively high inflation rates mainly to make up for, and to perhaps exploit, lagging internal and external liberalization in their economies. Out-of-sample forecasts, based on expected developments in the underlying structure of these economies, and assuming no changes in institutions, suggest that incentives may be diminishing, but not to the point where inflation levels below 5 percent could credibly be announced as targets. Greater economic liberalization would help reduce incentives for higher inflation, and enhancements to central bank independence could help shield these central banks from pressures.

Institutional development in new and potential member countries determines the success of both the catching-up of developing European countries and the deepening of the European integration process. This paper argues that the timing of future enlargement should depend on institutional convergence between the EU and potential accession candidates. Therefore, the paper looks at institutional quality in the EU, in the EU's neighboring Balkan and Black Sea regions, and especially in Bulgaria, Romania, Croatia, Turkey, and Ukraine, i.e. the next countries in the queue for entry or likely to lobby for entry into the EU. Three dimensions of institutional quality - legislative, administrative, and judicative institutions - are analyzed on the basis of the World Bank Governance Indicators using institutional quality in EU member states as a benchmark in order to reveal institutional deficits.

Recent research has shown that optimal monetary policy may display considerable price-level drift. Proponents of price-level targeting have argued that the costs of eliminating the price-level drift may be reduced if the central bank responds flexibly by returning the price level only gradually to the target path (Gaspar et al., 2010). We revisit this argument in two variants of the New Keynesian model. We show that in a two-sector version of the model which allows for changes in relative prices across sectors, the costs of stabilisation under price-level targeting remain much higher than under inflation targeting for all policy-relevant horizons. Our conclusion is that extending the policy horizon is not a panacea to reduce the costs of eliminating pricelevel drift.

This paper investigates the optimal monetary policy response to a shock to collateral when policymakers act under discretion and face model uncertainty. The analysis is based on a New Keynesian model where banks supply loans to transaction constrained consumers. Our results confirm the literature on model uncertainty with respect to a cost-push shock. Insuring against model misspecification leads to a more aggressive policy response. The same is true for a shock to collateral. A preference for robustness leads to a more aggressive policy. Increasing the weight attached to interest rate smoothing raises the degree of aggressiveness. Our results indicate that a preference for robustness crucially depends on the way different types of disturbances affect the economy: in the case of a shock to collateral the policymaker does not need to be as much worried about model misspecification as in the case of a conventional cost-push shock.

Institutional development in new and potential member countries determines the success of both the catching-up of developing European countries and the deepening of the European integration process. This paper argues that the timing of future enlargement should depend on institutional convergence between the EU and potential accession candidates. Therefore, the paper looks at institutional quality in the EU, in the EU's neighboring Balkan and Black Sea regions, and especially in Bulgaria, Romania, Croatia, Turkey, and Ukraine, i.e. the next countries in the queue for entry or likely to lobby for entry into the EU. Three dimensions of institutional qualitylegislative, administrative, and judicative institutionsare analyzed on the basis of the World Bank Governance Indicators using institutional quality in EU member states as a benchmark in order to reveal institutional deficits.