Dirty floating and monetary independence in Central and Eastern Europe - The role of structural breaks

Obtaining reliable estimates of the volatility of interest rates and exchange rates is a necessary condition to evaluate issues related to monetary independence and fear of floating. In this paper we use methods which explicitly account for structural breaks in the volatility dynamics in order to assess monetary independence in the Czech Republic, Hungary and Poland. Our results indicate that the explicit modelling of structural breaks in volatility estimates can lead to striking differences concerning the evidence of monetary independence in Central and Eastern Europe. The results based on volatility estimates which account for regime change tend to indicate that the Czech Republic, Hungary and Poland have had a significant degree of monetary independence in the last decade.