Monetary and Fiscal Policy Conflicts in Central Europe: How Credible are Macro Policies in the Phase of Preparation for EMU?

Abstract

Th is essay explores the challenges facing the policy mix in Central Europe (Hungary, Poland, Czech Republic) since 2000. At the turn of the century, their independent central banks implemented a monetary policy strategy of infl ation targeting aiming for disinfl ation while the countries concomitantly started preparing their entry into the European Monetary Union (EMU), even before their accession to the EU in May 2004.1 Th is period was characterized by several episodes of confl icts between the central banks’ monetary policy and the governments’ fi scal policies, which brings to mind the confl ict that opposed the national governments and the European central bank (ECB) in the fi rst years of EMU. Th is latter confl ict has been interpreted in terms of the diffi culty for the new ECB to establish its credibility, leading it to implement a perhaps excessively restrictive monetary policy.2 Can the policy-mix confl icts in Central Europe in the 2000s be interpreted in the same framework? It seems that although the question of the central bank’s credibility is relevant, the question of the government’s fi scal policy credibility also arises, thus posing more generally the question of the credibility of macro-policies in the phase of preparation for EMU, in relation to their institutional framework.