The monetary policy in the CEE countries after 2000 was conducted in a specific context linked with European integration. Therefore, when examining monetary policy of that period, it is necessary to consider long- and medium-term objectives of macroeconomic policy (fiscal and monetary), implied by the approaching accession to the European Union as well as by the declared intention to join the Economic and Monetary Union (EMU). Countries planning to accede to the EMU must fulfil the criteria presented in the Maas- tricht Treaty, out of which three refer directly to monetary policy. They are: price stability , interest rates convergence and stability of exchange rate criterion (see Box I.8).
Bearing in mind the above, countries can be divided into two groups depending on the exchange rate regime. The first group includes the Baltic states which applied either the currency board or the fixed exchange rate. Their main objective was to maintain the above regimes until the adoption of the common currency under the EMU. It should be emphasised that in case of these countries monetary policy could not be either expansive or restrictive in precise sense of these terms because fixing of exchange rates implies the exogene- ity of money supply, inflation and interest rates. Because these countries at the same time have been conducting prudent fiscal policy, it can be acknowledged that the monetary conditions in these economies were largely independent from the measures undertaken by the governments and related to monetary policy in the euro zone. The second group, relatively diversified in terms of not only level Country Czech Republic Hungary Hungary Poland Poland Poland Slovenia Lithuania Latvia Estonia Slovakia Period 2001-2003 2001-2002 2003-2005 2001-2002 2002-2003 2003-2005 2001-2005 2001-2005 2001-2005 2002-2005 2001-2004 Fiscal impulse
Increase in public investment and consumption
Increase in public investment, consumption and transfers Increase in transfers and public investment
Increase in transfers
Decrease in income
Decrease in transfers
Decrease in public consumption and transfers
Decrease in public consumption, increase in investment
Decrease in transfers, increase in public investment, temporary increase followed by a decrease in consumption Decrease in public consumption, transfers and investment
Decrease in public consumption, transfers and investment
Financing method
Increase in taxes and deficit
Increase in taxes and deficit Increase in taxes and deficit Increase in deficit Increase in deficit Decrease in deficit Decrease in deficit Decrease in deficit Decrease in deficit Increase in budgetary surplus Decrease in deficit
Expected impact on labour market and output
Neutral on labour market, moderately positive on output
Negative on participation and employ- ment, neutral on output
Negative on participation and employ- ment, neutral on output
Negative on perticipation and employment
Neutral or slightly positive on capital and labour supply
Positive on participation and employment
Positive on participation and output
Positive on employment and output
Positive on participation, employment and output
Positive on participation and employment, neutral or positive on output
Positive on participation and employment, neutral or positive on output
63 and growth of GDP but also of the fiscal policy conducted, includes all remaining countries, with floating exchange rate regime. The monetary authorities in these countries aimed for greater flexibility of exchange rate regime in the pre-accession period so that the adjustments related to the prospective adoption of the so-called Exchange Rate Mechanism (ERM II) would gradually occur. Slovenia is to some extent specific in this respect because, since regaining independence, it had been applying (in practice, significantly) man- aged floating exchange rate in order to join the ERM II in mid-2004 and replace the Slovenian tolar with the euro in 2007. Because of the above factors, when analysing the restrictiveness of monetary policy we focus on the countries with floating exchange rates.
Similarly to evolution of economic situation and GDP which, in the period 2000-2005, were closely related to unfolding of global economic situation, the evolution of nominal variables in the NMS8 was related to the developments in price dynamics in the world markets. Thus, modifications of tradables’ prices were of primary importance for the price movements in the CEE region. Two periods of homogeneous increase of the CPI dynamics across the region merit particular attention (see Chart I.41). The first period, covering the years 2000-2001, was connected above all to a considerable increase in oil prices, as a result of which relative prices of fuels and other categories of goods grew, thus leading to higher dynamics of the average price index. The second episode of common acceleration in price growth accompanied the EU accession in 2004. It was therefore specific for the NMS8 and applied to all of them except for Slovenia.
In 2000, the earlier widespread disinflation processes were halted or even reversed (see Chart I.41). However, both factors that stood behind the above development proved transitory – as from 2001 the global economy, and thus also the CEE countries, slowed down, and the oil prices were adjusted downwards. Consequently, the economic downturn, caused by a decline in global demand, was ac- companied by a decrease of price dynamics, which was then followed by a gradual reductions of nominal interest rates. As a result consequence, as presented in Chart I.42, the stable expected real market interest rates were common feature of NMS8 economies in the period 2000-2001.
Chart I.41.
Inflation rates in the NMS8 in the period 2000-2005
Remarks: Inflation rates on HCPI in accordance with the Eurostat methodology.
Source: Own elaboration based on Eurostat data.
Poland distinguished itself in this context with interest rates that were increasing for a longer period, in fact as long as until mid-2001. Consequently, the tightening of monetary policy in 1999 – prompted above all by the fact that actual inflation rate equalled almost double the target of the National Bank of Poland almost – and introduced concurrently to still high GDP growth, lasted so long that the global economic slowdown as well as the internal deterioration of productivity growth rate hit Poland when it had significantly higher real interest rates than the other countries in the region. Therefore, it can be claimed that the policy of the National Bank of Poland was then clearly restrictive and it markedly differed from the neutral attitude of the central banks of the other CEE countries. Hence, it seems that, for the first time as from the beginning of transition, monetary policy could – due to cautious and delayed cuts in interest rates – adversely affect real economy by contributing to the strengthening of the adverse shock that affected Poland at the turn of 2000-2001.
Czech Republic Poland Slovakia Hungary Estonia Lithuania Latvia Slovenia
I q 2000III q 20 00 I q 2001III q 2001I q 2002III q 20 02 I q 20 03 III q 2003 I q 200 4 III q 2004 I q 20 05 III q 2005 I q 20 06 III q 2006 I q 20 00 III q 2000 I q 20 01 III q 2001 I q 20 02 III q 2002 I q 20 03 III q 2003 I q 200 4 III q 2004 I q 20 05 III q 2005 I q 20 06 III q 2006
64
Chart I.42.
Expected short-term ex ante real interest rates in the NMS8 in the period 2000-2005
Remarks: Adaptive expectations have been assumed – the rate of price changes expected over the forthcoming 12 months is equal to the average 12 month inflation recorded in the last two quarters preceding the moment of prediction.
Source: Own elaboration based on Eurostat data.