Inflation Volatility, Monetary Policy, and Exchange-Rate Regimes in Central and Eastern Europe: Evidence from Parametric and Nonparametric Analyses

Abstract

Years after the fall of Communism, countries in Central and Eastern Europe follow a variety of often-changing exchange-rate and inflation targets. How has inflation behaved under such different regimes? This article compares monthly CPI and PPI inflation for six fixed-rate and four floating-rate currencies before estimating structural breaks in each series. It compares whether the mean and variance differ across the breaks in each series, using parametric and nonparametric tests. Granger causality testing is used to examine spillovers between inflation- and exchange-rate volatility. Overall, time-series properties differ across series and regimes, with the Balkans most susceptible to spillovers between exchange-rate and inflation volatility.

Keywords:

• Central/Eastern Europe
• Granger causality
• inflation
• nonparametric methods
• volatility

JEL Classification:

• F41
• E31

Notes

1. For countries that adopted the euro, the domestic currency rate is used until the adoption rate, and the official conversion rate thereafter. Log changes, then, would be zero after accession.

2. Another method, suggested by a conference discussant, would involve Granger causality in a panel setting. This worthy approach would be interesting if applied to an additional project.

Additional information

Notes on contributors

Scott W. Hegerty

Scott W. Hegerty is Associate Professor of Economics at Northeastern Illinois University, Chicago, IL.