Is Inflation Targeting Effective?

This paper estimates the monetary transmission mechanisms in four inflation-targeting new EU members: the Czech Republic, Hungary, Slovakia, and Poland. We use a structural vector error-correction model to identify the monetary shock with long-run restrictions. We find that a restrictive monetary shock has a significant negative effect on the inflation rate in all the countries considered. In response to a one-percentage-point shock in the nominal interest rate, inflation falls by half to one percentage point and returns to steady state after four to six months. Therefore, inflation targeting is likely to be an effective strategy on these countries' way to join the European Monetary Union. The policy might also be a relevant option for future EU member states.