Projects / Programmes
Optimisation of monetary policy under the process of nominal and real convergence of transition countries
| Code |
Science |
Field |
Subfield |
| 5.02.00 |
Social sciences |
Economics |
|
| Code |
Science |
Field |
| S180 |
Social sciences |
Economics, econometrics, economic theory, economic systems, economic policy |
Stability of monetary policy, expectations, chaos theory, Balassa-Samuelson effect, exchange rate pass-through, real exchange rates, transition, ERM2
Researchers (7)
Organisations (2)
Abstract
Research project will investigate optimisation of monetary policy in transition countries under structural characteristics of transition countries (the Balassa-Samuelson effect and exchange rate pass-trhroug) and their impact on forming expectations in both-tradale and nontradable sector.
Determinants of expectations will be formed analogously as in DeGrauwe and Dewachter in the case of dividing private agents expectations (involved foreign exchange markets) as fundamentalists and chartists. Dynamics of such expectations will help us investigate nature of forming expectations in transition economies and to test whether divergent expectations entering real exchange rate (despite being fixed) can cause chaotic dynamics.
The confirmation of such approach will be investigated through Balassa-Samuelson effect and effect that accomoditative exchange rate policy has on pass-through on modeling expectations in tradable and notradable sectors. Private agents in nontradable sector will most probably use the same rules to build expectations as chartists do - by using backward looking rules; because of tendency to equailze wages through both sectors (where wage pressures in nontradable sector come from raising wages in tradable sector caused by increased productivity) according to wages pressure in the historical period and because of tendency to learn from accomoditative policy that is being built in historical experiences of private agents, on which private agents form their future expectations. Both experiences caused either by structural changes or policy instruments will reflect historical bacground for future formation of expectations. On the other hand, the law of one price implies that agents in tradable sector form their expectations the way fundamentalists do - by using forward looking rules; since they expect their prices to converge on the level of prices in international markets (in our example - prices within EMU markets). Price levels on international markets will imply stabilities expected by using fundamentalists rules.
Stability of monetary policy (and its ability to bring down the level of inflation, that has sources in above mentioned processes) will be verified by entering the speculative dynamics of forming expectations about prices in both sectors. We will use framework conditioned by limited ability to fluctuate while being in ERM2 and before entering ERM2.
Analysis will be followed by introducing inflation targeting as an element for optimising information loss. Inflation targeting will imply unification between information stored by private agents and monetary policy in order to increase stability of monetary policy (faster decreasing of inflation). In both cases (with or withouth inflation targeting) trajectories of prices in nontradable and tradable sectors and of nominal and real exchange rates will be developed conditioned on the process of fixation of domestic currency (ERM2). Inflation targeting will imply chanelling private agents" expectations. Some corrections will be made for cases of asymmetric and partial information and synchronisation of spectator (private agent) with source of information (monetary authorities).
Research project will be concluded by mathematical simulation of the model and policy implications.
