Is monetary policy in the new EU member states asymmetric?

• Published in: Economic systems Vol. 36; no. 2; pp. 235 - 263
• Main Author: Vasicek, Borek
• Format: Journal Article
• Language: English
• Published: Heidelberg Elsevier B.V 01.06.2012; Elsevier BV
• Subjects: Asymmetry; Economic models; Estimation; Europe; European Union; Generalized method of moments; Inflation targeting; Member states; Monetary policy; Monetary theory; Non-linear models; Nonlinear Taylor rules; Studies; Taylor rule; Threshold estimation; Hungary; Poland; Czech Republic; Inflation targeting; C32; E52; Nonlinear Taylor rules; Monetary policy; E58; Threshold estimation
• ISSN: 0939-3625; 1878-5433
• DOI: 10.1016/j.ecosys.2011.07.003

► We test asymmetries in monetary policy of three new EU member states (CZE, HUN, POL). ► GMM estimator and sample spilling techniques are employed. ► Asymmetric preferences rather than nonlinearities in economic systems drive policy asymmetries. ► Evidence on policy switches according to the intensity of financial distress in the economy is found. Estimated Taylor rules have become popular as a description of monetary policy conduct. There are numerous reasons why real monetary policy can be asymmetric and estimated Taylor rules nonlinear. This paper tests whether monetary policy can be described as asymmetric in three new European Union (EU) members (the Czech Republic, Hungary, and Poland) which apply an inflation targeting regime. Two different empirical frameworks are used: (i) Generalized Method of Moments (GMM) estimation of models that allow discrimination between sources of potential policy asymmetry but are conditioned by specific underlying relations, and (ii) a flexible framework of sample splitting where nonlinearity enters via a threshold variable and monetary policy is allowed to switch between regimes. We find generally little evidence for asymmetric policy driven by nonlinearities in economic systems, some evidence for asymmetric preferences, and some interesting evidence on policy switches driven by the intensity of financial distress in the economy.