Monetary policy rules for transition economies: an empirical analysis

In this paper, we innovatively apply both Taylor rule, where an interest rate is used as a policy reaction, and McCallum rule, where monetary base is considered as a policy instrument, for the new EU member states in analysing monetary policy reaction functions. For the Czech Republic, Poland, Slovakia and Slovenia, the Taylor rule is found to be suitable to exchange rate targeting, whereas the McCallum rule may be applicable to inflation targeting. Evidence also reveals that for Hungary and Romania, inflation targeting coexists with that of exchange rates taking account of both reactions of interest rates and money.