Monetary policy and the disinflation on the way to the euro in Slovenia

Abstract

To cope with the inflation increase to almost 10%, coupled with a weakened external position, in 1999 the Bank of Slovenia (BoS) implemented inflation targeting within a managed float regime. On the basis of the estimated macroeconomic transmission, we argue in favour of using an interest rate rule to achieve price stability. Furthermore, the inflation response to shocks is found to be highly persistent, which points to a strong need for active macroeconomic policy to maintain price stability. The increase in interest rates after 2000 strongly contributed to resuming of the disinflation trend. While the exchange rate was roughly neutral, a moderately negative output-gap, falling oil prices and inflation expectations also contributed to disinflation.