A Structural Analysis of Central Banks Final Objectives Prioritization. The Case of Central and Eastern European States

Abstract

This paper aims to identify the actual objectives of monetary authorities in Central and Eastern Europe (CEE) that promote an independent monetary policy. In this sense we consider the study of central banks (CBs) behavior in the Czech Republic, Poland, Romania and Hungary in establishing short-term nominal interest rate by estimating a Taylor-type monetary policy rule, with new features in terms of elements aimed at exploring the interactions between the monetary policy and financial stability. We estimate the monetary policy rule based on a dynamic structural stochastic general equilibrium model (DSGE). The main results revealed the strong orientation of the monetary authorities subject to analysis towards their fundamental objective of price stability, but in parallel, to the stabilization of the exchange rate and real economic activity. Inserting into the Taylor-type rule of financial stability-related variables has allowed us to highlight the existence of specific items that indicate a ‘leaning against the wind’ orientation of monetary policy in CEE countries.