Monetary policy and nominal convergence in CEE countries with inflation targeting

The article discusses the monetary policy in small open economies with inflation targeting and their nominal convergence to the larger monetary area. Using panel data set, the paper considers the relationship between interest rates of interbank markets in the euro area and selected Central European countries – non-euro members of the European Union that follow inflation targeting strategy. We test for panel cointegration and use two estimators: Augmented Mean Group and Random Coefficients. The empirical results show that in the long run the interest rates of non-euro EU countries follow the Eurozone interest rates. What is more important, the AMG model’s common dynamic insignificance suggests that other factors are not relevant to the nature of interest rates transmission.