Abstract
The paper explores (former) transition economies, Poland, Czech Republic, Slovakia and the Republic of Serbia, concerning abandonment of the exchange rate targeting and fixed exchange rate regimes and movement toward explicit/implicit inflation targeting and flexible exchange rate regimes. The paper identifies different subperiods concerning crucial monetary and exchange rate regimes, and tracks the changes of specific monetary transmission channels i.e. exchange rate channel, interest rate channel, indirect and direct influences to the exchange rate, with variance decomposition of VAR/VEC model. The empirical results indicate that Polish monetary strategy toward higher monetary and exchange rate flexibility has been performed smoothly, gradually and planned, compared to the Slovak and, especially, Czech case. The comparison of three former transition economies with the Serbian case indicate strong and persistent exchange rate pass-through, low interest rate pass-through, significant indirect and direct influence to the exchange rate as potential obstacles for successful inflation targeting in the Republic of Serbia.
Highlights
Former transition economies, members of the European Union (EU hereafter), used different exchange rate regimes and monetary policy frameworks in the transition process, on the road to the EU membership
The paper investigates the changes of nominal anchors and exchange rate regimes in the cases of Poland, the Czech Republic, Slovakia and the Republic of Serbia
All these countries have moved toward more flexible exchange rate regimes with the adoption of managed/free floating regimes and implicit/explicit inflation targeting framework
Summary
Members of the European Union (EU hereafter), used different exchange rate regimes and monetary policy frameworks in the transition process, on the road to the EU membership (for an overview on exchange rate regimes choice in emerging countries, see Jean-Pierre Allegret, 2007; and Kosta Josifidis, Jean-Pierre Allegret, and Emilija Beker, 2009). An exchange rate is a natural anchor in transition economies having in mind (hyper)-inflationary past. After this initial stabilization phase, at least three groups of countries can be distinguished. Estonia and Lithuania chose currency board and exchange rate targeting monetary regime in June 1992 and March 1994, respectively. The second group of countries – including Slovenia, Bulgaria and Romania – followed no specific way, staying on the rigid exchange rate form or performing more flexible regimes with different nominal anchors. Slovenia used intermediate exchange rate regime, namely the target zone of ERM II and in the end, joined the monetary union in January 2007. A common feature for Slovenia, Bulgaria and Romania is the absence of explicit monetary strategy with the single anchor, like exchange rate targeting or inflation targeting
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