Inflation Uncertainty, Output Growth Uncertainty and Macroeconomic Performance: Comparing Alternative Exchange Rate Regimes in Eastern Europe

TL;DR

This study compares the impact of Currency Boards and Inflation targeting regimes on inflation, output growth, and uncertainties in Eastern European countries from 2000 onwards, highlighting the effects of EU enlargement on regime performance.

Contribution

It provides an econometric comparison of two contrasting monetary regimes in Eastern Europe, analyzing their influence on macroeconomic variables and uncertainties over two decades.

Findings

No clear superiority of either regime in macroeconomic performance

EU enlargement may have reduced differences between regimes

Regime effects on inflation and growth uncertainties are inconclusive

Abstract

In the late 90's, after severe financial and economic crisis, accompanied by inflation and exchange rate instability, Eastern Europe emerged into two groups of countries with radically contrasting monetary regimes (Currency Boards and Inflation targeting). The task of our study is to compare econometrically the performance of these two regimes in terms of the relationship between inflation, output growth, nominal and real uncertainties from 2000 till now. In other words, we test the hypothesis of non-neutrality of monetary and exchange rate regimes with respect to these connections. In a whole, the empirical results do not allow us to judge which monetary regime is more appropriate and reasonable to assume. EU enlargement is one of the possible explanations for the numbing of the differences and the lack of coherence between the two regimes in terms of inflation, growth and their uncertainties