Performances of selected European economies in achieving their inflation targets: The non-stationary discrete choice model approach

Abstract

Measurement of the performances of inflation targeting (IT) frameworks has been of interest to researchers ever since IT began to be implemented as a monetary policy strategy. The purpose of this paper is to evaluate the impact of domestic and international determinants on success in achieving inflation targets of the selected European economies. Our methodological framework is based on the application of a non-stationary discrete choice model. For this research, four European economies are considered: Czech Republic, Hungary, Poland and Serbia. Their results regarding IT policy can provide a useful benchmark for similar economies that are either planning to adopt the same monetary policy framework or have begun to apply it recently. Our findings indicate that IT success is primarily under the control of monetary policymakers by key policy rate mechanism, but that the impact of additional domestic and international factors that are not easily managed by the central bank like budget balance, exchange rate, growth rate, current account balance, labor cost growth, loans, Harmonized Index of Consumer Prices, inflation, and GDP gap of the Eurozone, can be also significant. Consequently, monetary policymakers need to take into account a wide range of inflation factors, including foreign spillover effects, so that tools for their neutralization can be helpful in achieving the targeted goals.