Monetary policy rule in inflation targeting emerging European countries: A discrete choice approach

The paper explores all six emerging European countries that target inflation, showing that a discrete choice model captures well the behavior of their central banks, both their monetary policy rule and operational behavior. As to the latter, our findings suggest that these central banks change their policy rates in discrete fashion, i.e. only when the deviation between its (unobservable) optimal rate and actual rate surpasses certain threshold values. Estimates of Taylor rule contain relevant economic variables, including real exchange rate. However, evidence is offered that in Romania, Serbia and Albania the exchange rate is a goal for itself, while in the Czech Republic, Poland and Hungary it is an instrument to achieve inflation target, and this is related to different features of these two sets of economies. The use of the nonstationary discrete choice approach is well motivated as some explanatory variables are nonstationary.